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They claim that Canadian house prices are overvalued by 78 %, the highest of any nation.
In contrast for example, American houses are undervalued by -7%.
Canada also has the most expensive housing in terms of earnings to home prices, in Canada it is 34 %, whereas in the the USA it's (-20%).
I'm trying to figure out if this means Canada is prospering or if it means its in a housing bubble, or both? or neither...
I do agree that homes in Canada are grossly overpriced and present poor value compared to many US cities. Whether or not a bubble exists, I don't think a massive correction (more than 20%) is realistic.
I also think the results are skewed because the majority of Canadians live in major cities. Toronto, Vancouver, Calgary etc are not cheap because demand in Canada is concentrated to 7 or 8 major centres. In the US, demand is spread over dozens of major centres. What is it, 1/3 of Canadians live in Southern Ontario?
If 1/3 of Americans lived in NYC, San Francisco or any of Americas most expensive areas, their affordability ratios likely wouldn't be too far off.
But I would give anything for a desirable major city in Canada to have the prices of a place like Phoenix or Houston.
They claim that Canadian house prices are overvalued by 78 %, the highest of any nation.
In contrast for example, American houses are undervalued by -7%.
Canada also has the most expensive housing in terms of earnings to home prices, in Canada it is 34 %, whereas in the the USA it's (-20%).
I'm trying to figure out if this means Canada is prospering or if it means its in a housing bubble, or both? or neither...
What do you think?
For myself I take most of what economists say with a grain of salt. Their record is not that great on predicting the future. We've been hearing about a crash or major correction for ten years now, possibly more. Of course eventually the markets will go down, then up, then down as markets do.
Also they are not claiming that housing prices are overvalued by 78 percent.. the quote is
"The first gauge is a price-to-rents ratio. This is analogous to the price-earnings ratio used for equities, with the rents going to property investors (or saved by homeowners) equivalent to corporate profits. The measure displays a massive range, from a whopping 78% overvaluation in Canada to an undervaluation of 37% in Japan. "
Not the same thing. They are talking about the value of the property to the amount they can collect in rent. There are unique reasons why in Canada why this is the case. One of the people who commented on that page sums it up very well.
"GDofKitchenerJan 16th, 17:32
Being Director of Risk of a real estate financing fund in Canada, I can speak as to why rental stock is so highly overvalued, compared to the underlying rents.
The majority of this effect is that there is government backed mortgage insurance (CMHC) available for rental housing, that helps to hold prices up, by allowing a higher return to equity investors. A normal commercial plaza cap rate (ineligible for CMHC insurance) would be 7% a similar cap rate for a multi-unit residential in the same marketplace might be 5.5%. This difference might result in a 27% increase in the valuation of multi-unit residential compared to the valuation of commercial plaza with a similar cash flow. The low returns on constructing multi-unit residential have caused an incredible aging on stock in the marketplace, so that few built units change hands. CMHC charged with making homes more affordable has recently taken on a larger role in rental unit financing, and is changing the equation.
Many rental units are being converted to condos with a few units sold to owner/occupied, and then the remaining units sold to retail investors who will hold a block of units. These offer a type of tax shelter that can be an attractive investment to those who hold five or fewer units as they can get CMHC coverage on these units. This type of conversion is also attractive to developers as they are able to avoid large infrastructure taxes on new builds, by simply converting old rental units to condos. This effect is significant, but difficult to quantify. My estimation is that it would probably be around 15-20% of valuation.
Also, in the last 10 years the number of purchases made by foreign purchasers as a percentage of the overall sales has increase incredibly, most of these purchases are in rental stock, as the buyer remains domiciled elsewhere. This in conjunction with the CMHC changes, is now actually contributing to a building of many condos and rental units, and may start to decrease the average age of rental stock considerably. This growing source of demand has affected valuations considerably, but over a period of time. Whether this effect is permanent remains to be seen, however buyers of this type of asset quite often will purchase units with a 1-2% cap a valuation that many domestic purchasers can't match. This will displace demand into other markets, or locations causing some impact on overall values.
In the end the 76% over valuation based on rental revenue is predominantly caused by a number of policy effects that may not be comparable with other jurisdictions. However, there is no doubt in my mind that there is some overvaluation, but eliminating these effects may bring this more in line with the historical average. Also, the comparison to the disposable income approach may be more appropriate in Canada's case, as that will remove some of the effect of recent policy changes. It is my belief that pricing increases in real estate in Canada will between zero and the rate of inflation for an extended period of time, until this over valuation is corrected."
For myself I take most of what economists say with a grain of salt. Their record is not that great on predicting the future. We've been hearing about a crash or major correction for ten years now, possibly more. Of course eventually the markets will go down, then up, then down as markets do.
Also they are not claiming that housing prices are overvalued by 78 percent.. the quote is
"The first gauge is a price-to-rents ratio. This is analogous to the price-earnings ratio used for equities, with the rents going to property investors (or saved by homeowners) equivalent to corporate profits. The measure displays a massive range, from a whopping 78% overvaluation in Canada to an undervaluation of 37% in Japan. "
Not the same thing. They are talking about the value of the property to the amount they can collect in rent. There are unique reasons why in Canada why this is the case. One of the people who commented on that page sums it up very well.
"GDofKitchenerJan 16th, 17:32
Being Director of Risk of a real estate financing fund in Canada, I can speak as to why rental stock is so highly overvalued, compared to the underlying rents.
The majority of this effect is that there is government backed mortgage insurance (CMHC) available for rental housing, that helps to hold prices up, by allowing a higher return to equity investors. A normal commercial plaza cap rate (ineligible for CMHC insurance) would be 7% a similar cap rate for a multi-unit residential in the same marketplace might be 5.5%. This difference might result in a 27% increase in the valuation of multi-unit residential compared to the valuation of commercial plaza with a similar cash flow. The low returns on constructing multi-unit residential have caused an incredible aging on stock in the marketplace, so that few built units change hands. CMHC charged with making homes more affordable has recently taken on a larger role in rental unit financing, and is changing the equation.
Many rental units are being converted to condos with a few units sold to owner/occupied, and then the remaining units sold to retail investors who will hold a block of units. These offer a type of tax shelter that can be an attractive investment to those who hold five or fewer units as they can get CMHC coverage on these units. This type of conversion is also attractive to developers as they are able to avoid large infrastructure taxes on new builds, by simply converting old rental units to condos. This effect is significant, but difficult to quantify. My estimation is that it would probably be around 15-20% of valuation.
Also, in the last 10 years the number of purchases made by foreign purchasers as a percentage of the overall sales has increase incredibly, most of these purchases are in rental stock, as the buyer remains domiciled elsewhere. This in conjunction with the CMHC changes, is now actually contributing to a building of many condos and rental units, and may start to decrease the average age of rental stock considerably. This growing source of demand has affected valuations considerably, but over a period of time. Whether this effect is permanent remains to be seen, however buyers of this type of asset quite often will purchase units with a 1-2% cap a valuation that many domestic purchasers can't match. This will displace demand into other markets, or locations causing some impact on overall values.
In the end the 76% over valuation based on rental revenue is predominantly caused by a number of policy effects that may not be comparable with other jurisdictions. However, there is no doubt in my mind that there is some overvaluation, but eliminating these effects may bring this more in line with the historical average. Also, the comparison to the disposable income approach may be more appropriate in Canada's case, as that will remove some of the effect of recent policy changes. It is my belief that pricing increases in real estate in Canada will between zero and the rate of inflation for an extended period of time, until this over valuation is corrected."
I read this over a few times, but I don't get it....
I read this over a few times, but I don't get it....
It is kind of convoluted. LOL. My main point is that the non - rental housing in Canada is not over valued by 78 percent. For every doomsday prediction you'll find another economist saying the opposite. The Economist is famous here in Vancouver for lowering our liveability rating because of construction on the Malahat highway on Vancouver Island. Eye roll. Even after pointing out their error the insisted they were correct, saying they meant the Vancouver area, still not understanding that the traffic on Vancouver Island in no way affects Vancouver city. I know this shouldn't reflect on the whole magazine, but I lost any respect that I could muster for them.
Here's a Canadian viewpoint on our market, not a British one.
It's a very simplistic way of trying to determine if real estate is overvalued because it looks exclusively at price to rental ratio. There's alot more going on in a market than what a single market is going to reflect and that ratio is necessary but not sufficient to declare housing over-valued. Other factors are that money might be flowing into that asset because of the instability of other possible investments, interest rates, geographic land constraints, the amount and quality of existing rental stock, the laws of Canada meaning other benefits to putting money into the asset, how savvy buyers are regarding other places to put their money, zoning issues etc.
I wish it were that easy to assess a real estate market and just use one metric, the reality is that it's a very complicated thing to do and you have to have alot of information and familiarity with this sort of thing. That article is not a legit economic analysis.
I do agree that homes in Canada are grossly overpriced and present poor value compared to many US cities. Whether or not a bubble exists, I don't think a massive correction (more than 20%) is realistic.
I also think the results are skewed because the majority of Canadians live in major cities. Toronto, Vancouver, Calgary etc are not cheap because demand in Canada is concentrated to 7 or 8 major centres. In the US, demand is spread over dozens of major centres. What is it, 1/3 of Canadians live in Southern Ontario?
If 1/3 of Americans lived in NYC, San Francisco or any of Americas most expensive areas, their affordability ratios likely wouldn't be too far off.
But I would give anything for a desirable major city in Canada to have the prices of a place like Phoenix or Houston.
78% over valued? ridiculous numbers... to think my 1800 sq foot house in a Lake community in Calgary is only worth 100 grand lol lol you couldn't even by the materials for that price.
Prices in Calgary are still less than what they were in 07. Considering the low unemployment rate it's a bloody bargain.
BTW you missed the boat in Phoenix...some neighborhoods have increased in value by as much as 40% last year.....and they are still rising. woo hoo climb baby climb....
I read this over a few times, but I don't get it....
The point is that if this ratio is high, then either (a) homes are overpriced, (b) rent is too low, or both. I think it's probably both, i.e. home prices are overvalued in Vancouver and Toronto, but Canada also has very strong mechanisms to keep rents low and pushes the ratio up. For example, in Quebec, rent increases are limited by a government agency to the increase in the CPI index unless the owner made significant improvements to the property, and landlords are prohibited to kick someone out of an apartment unless they are planning to occupy the unit themselves. As a result, many people have been living in the same apartment for 20-25 years and their rent is much lower than the market rate.
Here's a study with a better measure of affordability. It is obviously more restricted in terms of coverage but it's also based on metropolitan areas rather than countries. It uses the ratio of median home price to median household income for each market.
(Table 5)
Most affordable: US 3.1
Ireland 3.2
Canada 3.6
UK 5.1
NZ 5.3
Least affordable: Australia 5.6
(they also look at Hong Kong which is obviously more expensive)
Here are the ranks from most affordable (#1) to least affordable (#337), obviously I'll only list Canadian metros:
#20 Fredericton, Moncton 2.3
#33 Saint John, Windsor 2.5
#73 Thunder Bay, Trois-Rivieres 2.8
#85 Charlottetown, Saguenay 2.9
#120 Sudbury 3.2
#146 Brantford, London 3.4
#159 Barrie, Halifax, Kingston, Ottawa-Gatineau, St. Catharines-Niagara 3.5
#175 St. John's, Winnipeg 3.6
#187 Edmonton, Oshawa 3.7
#200 Guelph, Regina 3.8
#210 Kitchener, Quebec, Sherbrooke 3.9
#220 Peterborough 4.1
#226 Calgary, Saskatoon 4.3
#239 Hamilton 4.6
#263 Montreal 5.1
#296 Toronto 5.9
#306 Victoria 6.3
#316 Abbotsford 6.8
#318 Kelowna 6.9
#336 Vancouver 9.5
I think it's fair to say that housing in BC cities is outrageously expensive and that it's fairly expensive in Southern Ontario too. Elsewhere, it's really nothing special.
thanks folks! that's useful information. I'll check those links out.
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