The Canadian housing market has attracted the attention of The Economist magazine.
In an article published November 26th ( www.economist.com/node/21540231) the authors make the case that home prices in Canada are overvalued by about 25% and that housing looks more overvalued than it was in the US at its peak of the bubble in 2007. The basis of this analysis is the use of the price-to-income ratio, a test of affordability, and the price-to-rent ratio, which is similar to a price-to-earnings measurement.
Is this analysis accurate or are there other factors that need to be considered?
There are many Canadian economists and other prognosticators who believe that housing in Canada is not headed for a crash. The reasons given include the following:
• Interest rates are at an all time low and are not expected to rise dramatically in the short term
• The annual increase in prices in most are of the country is steady and not frothy
• Certain areas of the country are enjoying strong immigration trends
• Certain areas of the country have become very attractive to off-shore buyers who are looking for “safe-havens” for their investment funds and/or an escape from other regions which are currently under financial or geopolitical stress.
Who is right?
I believe that both sides of the debate are accurate in their assessment. The excesses noted by The Economist are currently balanced out by the local Canadian view. However, as we all know, Canada is not different and world wide stresses will ultimately affect us. Will there be a crash? In my view, the most likely outcome is a softening in general and possibly a buyer’s strike in the markets that are supported by the off-shore investor when prices are not supported by low interest rates or attractive rental rates.
