Is the Canadian Housing Market Overvalued ?

[Thomas Beyer]

Synopsis of the attached IMF study:Results reveal that at the peak of the housing boom, house prices were significantly overvalued in the west. However, following the recent steep decline in prices, the overvaluation has decreased significantly; we find that house prices in Alberta and British Columbia remain slightly overvalued as of end-2009Q2 (at around 8 percent according to the model estimation), while at the peak of the housing boom, their overvaluation was estimated at double-digit levels. In contrast, house prices in the eastern provinces of Ontario and Quebec, and the western province of Saskatchewan are now close to equilibrium, even though the latter has also experienced significant overvaluation during the housing boom. Interestingly, the large run-up in house prices in the west in the 2000s, mostly reflects a catch-up from stubbornly undervalued levels following the housing collapse in the early 1990s.

.. far better than US ..

(emphasis mine)

Full report incl. some interesting graphs here: http://www.imf.org/external/pubs/ft/wp/2009/wp09235.pdf

 

[housingrental]

Thanks Thomas

 

[Nir]

Thanks.
small comment: in a way a price can not really be overvalued. when there is no government intervention price is usually simply a reflection of current supply qty meeting current demand qty. it`s ok to say you expect prices to drop. however that is not the same. the distinction is expecting prices to drop is predictive, current prices are not/are a fact.

 

[gwasser]

QUOTE (investmart @ Dec 30 2009, 10:02 PM) Thanks.
small comment: in a way a price can not really be overvalued. when there is no government intervention price is usually simply a reflection of current supply qty meeting current demand qty. it`s ok to say you expect prices to drop. however that is not the same. the distinction is expecting prices to drop is predictive, current prices are not/are a fact.

The above were assumptions made by Academics studying the stockmarket. It is called `Modern Portfolio Theory` and headed by scientists such as Fama (I forgot the first name). These were the same guys that claimed that Warren Buffett was a statistical aberration.

Reality is that markets over the long term may move around an average appreciation rate but short term, pricing is influenced by all kinds of factors. The most recent event of clear mispricing was of course the 2008 market crash. Modern Portfolio Theory has now been abandonned by many investors and even some academics.

Yes, amazingly there is a difference between theory and reality.

 

[Yev]

... Just because something is overvalued, or undervalued does not mean that it can`t become more significantly over/under valued

I draw your attention to Figure 2 in that publication that looks at Historical Price to Rent ratios for various countries. If I am reading this correctly, Canada currently has the highest price to rent ratio of the G7. Further, if you look at the Price to Rent ratio of Japan in 1989-90 and see what happened to Real Estate prices in that country over the last 20 years - one does start to worry

Yevgeni

 

[Thomas Beyer]

QUOTE (Yev @ Jan 1 2010, 04:48 PM) ..Further, if you look at the Price to Rent ratio of Japan in 1989-90 and see what happened to Real Estate prices in that country over the last 20 years - one does start to worry

not quite .. Canada has TWO HUGE HUGE advantages over Japan allowing higher home prices / home price growth:

a) INmigration .. thus continued GDP growth and more housing / rental demand

b) ample of resources "for free" rather than paying for it by importing from abroad: coal, oil, gas, water, uranium, potash, diamonds, copper, nickel ...

 

[Yev]

QUOTE (ThomasBeyer @ Jan 1 2010, 08:01 PM) not quite .. Canada has TWO HUGE HUGE advantages over Japan allowing higher home prices / home price growth:
a) INmigration .. thus continued GDP growth and more housing / rental demand

Canadian census is approaching 34M people. Annual rates of immigration are about 250K - as is the approximate annual DEATH rate in Canada (yes, there is also births, and INmigration to specific provinces/cities - but that still showing an annual growth rate that is DEPENDENT on the annual birth rate - and totals at about 1% per year)

QUOTE (ThomasBeyer @ Jan 1 2010, 08:01 PM) b) ample of resources "for free" rather than paying for it by importing from abroad: coal, oil, gas, water, uranium, potash, diamonds, copper, nickel ...
Can`t argue with the resource issue

However, with a very slow population increase, and a fairly rapidly aging population, I see a significant risk to real estate of certain types... specifically - the properties that are owned by the retiring baby boomers.

Yevgeni

 

[Thomas Beyer]

QUOTE (Yev @ Jan 2 2010, 11:06 AM) .. However, with a very slow population increase, and a fairly rapidly aging population, I see a significant risk to real estate of certain types... specifically - the properties that are owned by the retiring baby boomers.
1% is a HUGE population growth ..

Japan`s population i declining: no in-migration AND more people dieing than birth .. UNLIKE CANADA (or US or Australia !!!!)

and many provinces, like AB have actually a young population and thus MORE BIRTH and even FASTER population growth !

baby boomer have to live somewhere .. even if they are 65, 70,75, 80 ..

 

[Nir]

QUOTE (ThomasBeyer @ Jan 2 2010, 06:53 PM) 1% is a HUGE population growth ..

I agree and an increase in life expectancy will increase population growth in Canada even more.

So Yev, pls relax and follow Thomas Beyer`s golden rule:

"Don`t wait to invest in real estate .. Invest in real estate and wait !"

Cheers.

 

[MikeDix]

QUOTE (ThomasBeyer @ Dec 22 2009, 09:21 AM)
Synopsis of the attached IMF study:



Results reveal that at the peak of the housing boom, house prices were significantly overvalued in the west. However, following the recent steep decline in prices, the overvaluation has decreased significantly; we find that house prices in Alberta and British Columbia remain slightly overvalued as of end-2009Q2 (at around 8 percent according to the model estimation), while at the peak of the housing boom, their overvaluation was estimated at double-digit levels. In contrast, house prices in the eastern provinces of Ontario and Quebec, and the western province of Saskatchewan are now close to equilibrium, even though the latter has also experienced significant overvaluation during the housing boom. Interestingly, the large run-up in house prices in the west in the 2000s, mostly reflects a catch-up from stubbornly undervalued levels following the housing collapse in the early 1990s.



.. far better than US ..



(emphasis mine)



Full report incl. some interesting graphs here: http://www.imf.org/external/pubs/ft/wp/2009/wp09235.pdf






In addition to Thomas's post, check out the post here http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14880-Historic_house_prices.html. Personal opinion: The way I look at it is shares in 'Canada Inc' look pretty promising for future sustainable growth compared to other country real estate...shares in 'BC Retirement Inc' are also appealing as a long term hold.

 

[KieranTrass]

Interesting IMF report which concurs with our `TellMeTheTime` real estate cycle analysis findings for Canada.

Our independent assessment concluded that at present there is limited potential downside to values, in particular for the Greater Toronto Area (except we are uncertain about the Toronto Condo market, pending further research). We also identified the relatively small boom Canada had experienced in the boom phase of this cycle when compared to most other countries. This has worked in your favour as the market is much less vulnerable to rapid value adjustments down, than most other markets globally.

Another notable point in the IMF report, we had also identified in our assessment, was the comparison between Canadas West and East in this boom which reveals a slight overvaluation remains in the West but not so much, if at all, in the East.

In summary from our assessment, whilst not ruling out some volatility in values in Canadian markets in 2010, there appears to be limited potential downside for values, especially in the GTA, but equally unlikely to be much upside as the powerful emotion of fear spreads to some degree on the back of expected negative global financial news in 2010. For example we believe interest rates will be rising before long which will impact on existing borrowers (and introducing the fear of further rises) and reduce the number of potential purchasers in the market (again due to the fear of higher interest rates).

 

[preston]

Having been knee deep in the current UK property market crash I too am worried by the signs in Canada you will never experience the kind of fall in house prices that we have experienced however it simply boils down to affordability the price to earnings ratio hits a ceiling and there is a price correction which looking at certain areas of Canada will I`m sure happen in the next 12-18 months or so and will probably be triggered by a rise in rates . Canada is at the top of the market cycle no two ways about it and if prices continue to rise at current rates over the summer the only way is down!