Canada's Housing Market More Overvalued Than U.S. At Its Peak, The Economist Says

Canada Housing Bubble Overvalued Economist

The Huffington Post Canada   First Posted: 11/25/11 12:45 PM ET Updated: 11/25/11 01:50 PM ET

Canada’s housing market is more overvalued than the US’s market was at its peak, and Canadians are carrying a larger debt burden than Americans were before the crash, a report from The Economist states.

By comparing house prices to rental rate and income averages, the magazine found that Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden all have housing markets that are overvalued by at least 25 per cent.

Canada’s housing prices are overvalued by 29 per cent relative to income, and by 71 per cent relative to rental rates, the study found.

As The Economist notes, these numbers don’t necessarily mean that Canada is bound for a painful housing market crash, along with all the job losses that entails. “Adjustment could come through higher rents and wages,” the magazine reports.

However, there is little indication that rents and wages are catching up with house prices.

StatsCan’s latest report shows Canadians’ wages are actually falling, once adjusted for inflation. And rental rates in some of Canada’s largest markets -- such as Calgary, Ottawa and Toronto -- have fallen year-over-year, all of which suggests the gap between house prices and rent and income continues to grow.

Optimists say Canada's market remains resilient, and if homes are slightly overvalued, the market is in for a soft landing. Canada Mortgage and Housing Corp., which insures Canadians’ mortgages, expects house prices to increase next year, albeit at a more moderate pace than has recently been the case.

Yet others argue that Canada can sustain current price levels. They point to Switzerland -- which has seen enormous increases in house prices and has a median house approaching $900,000, nearly three times Canada’s $350,000 -- as proof that well-off countries can sustain expensive houses.

But The Economist’s research shows that, even with the massive price hikes, Switzerland’s real estate market is still undervalued, relative to income and rent, compared to its long-term average. (Yes, the Swiss are just that rich.)

Another concern is the influence of foreign investors on the market. By some counts, as many as one in five Vancouver homes are being bought by investors from abroad hoping to turn a profit on the red-hot housing market.

"If you eliminate this segment, you get a semi-normally functioning market," CIBC economist Benjamin Tal recently told QMI Agency. "If for some reason we see foreign investors in Vancouver or in Toronto exiting, then that definitely will be an issue."

The Economist also noted that Canadians are now carrying a larger debt burden, relative to income, than Americans were in 2007 when the housing collapse began.

“Overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates,” the magazine reported. “A credit crunch or recession could cause house prices to tumble in many more countries.”

WHAT $350,000 WILL BUY YOU IN THESE CANADIAN HOUSING MARKETS

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  • St. John's, Nfld. -- $125 Per Square Foot

    This four-bedroom, two-bathroom custom-built bungalow in St. John's West End neighbourhood boasts hardwood floors, a covered sundeck and an oversized yard. With an asking price of $349,900 and 2,750 square feet of livable space, this spacious home costs approximately $125 per square foot.

  • Trois Rivieres, Que. -- $127 Per Square Foot

    This five-bedroom, two-and-a-half bathroom house features a double-width garage and a heated inground pool. At approximately 2,750 square feet and an asking price of $349,900, it works out to around $127 per square foot.

  • Winnipeg -- $160 Per Square Foot

    This spacious split-level home in southeast Winnipeg features four bedrooms and three baths, a stone fireplace and a jazuzzi in the master bedroom. It sits on a 142-foot-long, pie-shaped lot. At 2,182 square feet and a $349,900 asking price, it works out to around $160 per square foot. <strong>CORRECTION:</strong> <em>An earlier version of this slide incorrectly listed the price-per-square foot as $600</em>.

  • Red Deer, Alta. -- $248 Per Square Foot

    This five-bedroom, three-bath home features vaulted ceilings, a fireplace and a massive walk-in closet in the master bedroom. At 1,408 square feet -- this average-sized house on the prairie works out to $248 per square foot.

  • Montreal -- $250 Per Square Foot

    This two-story townhouse condo just east of downtown Montreal features three bedrooms and two baths, cherry wood floors and a terrace. At 1,400 square feet and an asking price of $349,000, this condo works out to $250 per square foot.

  • Burlington, Ont. -- $388 Per Square Foot

    This cozy bungalow on the edges of the Greater Toronto Area features four bedrooms, two baths and a long, 175-foot lot. Highlights include a granite countertop and newly finished hardwood floors. At a snug 900 square feet, this house is going for $388 per square foot.

  • Toronto -- $499 Per Square Foot

    This one-bedroom, one-bath condo in Toronto's Entertainment District features a balcony with a southeast exposure. In a sure sign the condo is outfitted with just the basics, the unit's sellers boast of its "brand name appliances" and "frost free refrigerator." At 700 square feet (including the balcony), it works out to $499 per square foot.

  • Vancouver -- $688 Per Square Foot

    This one-bedroom, one-bathroom corner unit in Vancouver's Kitsilano neighbourhood "shows much larger than the square footage," the realtor boasts. That's good, because at 508 square feet, this place is only slightly larger than some of the bedrooms and living rooms available in similarly-priced houses in other markets. The condo boasts "gorgeous mountain views," but it'll cost you -- $688 per square foot.

MASSIVE SPIKE IN MILLION-DOLLAR HOMES ACROSS CANADA

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