The Conference Board of Canada says Paul Krugman and other economists are wrong when they say Canada is in for a debt and housing market bloodbath.
The economic research group expects house prices to remain high and to continue growing faster than incomes, and it says one of the reasons behind that is Canada’s large immigrant population.
In a report aiming to debunk the OECD’s recent claim that Canada has a severely overvalued housing market, the Conference Board noted that the top eight countries with the most overvalued housing markets all have high foreign-born populations.
“Even more striking, three of the eight most over-valued housing markets are located in the countries with the largest shares of foreign-born population: Australia, New Zealand and Canada,” the report notes.
However the report doesn’t address those countries with large foreign-born populations that still have undervalued housing markets in the OECD report. The U.S., Germany and Switzerland all have more than one-eighth foreign-born populations, and are listed as undervalued.
“The foreign-born population can significantly alter the landscape of a country’s housing market,” the Conference Board said. “If a specific market welcomes a relatively large share of wealthy immigrants, their arrival creates a new source of demand that not only stimulates demand for housing, but can also raise house prices significantly without any changes to personal disposable income per capita.”
But most immigrants aren’t wealthy, and the Board report says it’s actually immigrants’ lower average wages that are causing the spread between incomes and house prices to keep growing.
“Since the share of the foreign-born population has been rising continuously in Canada … one should therefore expect a steady rise in the house price-to-disposable income per capita ratio,” the report concludes.
That could potentially spell bad news in the long term, as this would suggest that housing affordability will continue to deteriorate in immigrant-heavy places like Toronto and Vancouver.
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World's most overvalued housing markets, according to The Economist (numbers may vary from OECD estimates):
But the idea that immigration drives up house prices is controversial. Many economists say immigration has no long-term impact on house prices as long as the construction of new homes meets the growing demand for them.
Some studies have even suggested the opposite: That high immigration levels can drive down house prices. That was the conclusion of a Cambridge University study, which found that immigrants depress prices at the neighbourhood level, by pushing higher-income groups out.
Yet other studies have supported the notion that immigration can raise house prices. That was the conclusion of a 2009 study on Spain’s housing market, which found that immigration increased house prices by 52 per cent during that country’s housing boom, from 1998 to 2008.
However, Spain’s housing market has suffered a major collapse since that study was released, with house prices falling as much as 40 per cent in some areas. That would indicate immigrant populations are no guarantee of a healthy housing market.
All the same, the Conference Board concludes that, even though some Canadian housing markets are in for “slight declines” in the coming months, Canada’s housing market “is nowhere near about to correct drastically.”
Perhaps a stronger argument for the resilience of Canada’s housing market can be found in comments from TD Bank economist Diana Petramala, who said Canadians “are far less financially vulnerable than their U.S. counterparts were heading into the crisis,” according to the Financial Post.
Mortgage delinquency rates in Canada are one-third what they were in the run-up to the U.S. housing crash, she said.
Petramala points out that housing affordability has actually improved for the past two quarters, thanks in part to banks offering rock-bottom mortgage rates over the past year.
However, there is reason to believe sub-three-per-cent mortgage rates may be coming to an end.