Housing in Australia, Belgium, Canada, and France looks more overvalued than it was in America at the peak of its bubble according to a new article by The Economist.
According to their research, Canadian housing is now overvalued by a “whopping” 78% in relation to rents and by 34% relative to disposable income. In contrast, the USA market is undervalued by -7% and -20% using the same measures.
Canada now has even higher household-debt burdens in relation to income than America did at the peak of its bubble. The risk is that overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates.
The Economist cites a popular argument used to justify high prices in countries such as Canada is that a rising population pushes up demand, but they rebut this by explaining that this should raise both prices and rents, leaving their ratios unchanged.
On the other hand, they note that prices don’t necessarily need to drop sharply to return to fair value: “Adjustment could come through higher rents and wages. With low inflation, however, it could take a decade or more before price ratios return to their long-run average in some countries.”
You can read the entire article here