Economist: Canadian Housing Overvalued by 35% in comparison to income.

20 Replies

... and by 89% in comparison to rents.

Australia and Canada share the dubious prestige of having housing prices the most out of alignment with the rest of their economies.

The Economist, "Global Housing Markets: Property Puzzles"

CBC, Canadian Housing Prices 35% Over Valued

CBC, Analysis: Overvalued Home Prices Could Put New Owners at Risk

The only good news from the perspective of the Atlantic Provinces is we've been the anchor on Canada's housing price to family income ratio for the past decade - without our representation, the Economist would be reporting an even higher percentage of over valuation.   When the froth does come off, the devaluation impact on this side of the country will be less than that on the left coast or in the middle. 

We are from Canada and about to buy first investment property. These news are alarming, but if we decide to wait, then we might be waiting forever. Tough decision to be made very soon.

Many people, particularly around the GTA, are absolutely oblivious to this frothiness.  It's going to be a sobering reality for many who are getting in at the top.  Hopefully they've bought wisely with cashflowing properties to cover their expenses until values return.  

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@Chad U.  

 We were debating - buy a property with small, but still positive cashflow and none to moderate appreciating potential, or with small negative cashflow with greater appreciating potential. 

I like the strategy you suggested to buy with some positive cashflow, which can help to get through tough times if bubble bursts, as our plan is somewhat long term hold  for 5-10 years. Yet according to the same articles, rent is over valued by as much as 89%, which means rent might drop even more drastically than house prices?

It's a tough call. I've been reading articles saying Canadian housing is overvalued since 2010 and that the bubble in Australian housing would collapse soon (that was in 2010). Where I live, (Victoria) prices went sideways for a few years and now are climbing again. It's ridiculous. But look at Hong Kong. Who's to day that they'll drop, maybe it just means the appreciation potential isn't there?

Let's not forget that the GTA and GVA and maybe Montreal (I'm not familiar with the Montreal market) are the main culprits here. They have a history of boom-bust real estate cycles and because they represent such a large percentage of the country's population and in turn real estate sales, they skew the numbers.

However, outside of these few metro areas many cities and towns how much more stable real estate markets. They don't go up as much or as fast and so they won't come down as much either.

Case in point. Back in the early '90s prices in the Toronto condo market fell by as much as 50%. But an hour away here in Kitchener-Waterloo prices only fell 9 or 10%. That's pretty much the biggest price correction we've ever had here, and I'm sure there are lots of other cities with similar stories to tell.

@Sergey S. is correct that there are a handful of regional markets responsible for most of the run-up: Toronto (GTA) and Vancouver (GVA) being the leaders with year-over-year price increases in excess of 7%.  Until recently Calgary was also on the list.  Montréal (MTL) is more of a follower than leader in the boom-bust cycle this time around as the local economy is not performing as it has in the past.

Here in the Maritimes, Halifax is the only city under a full head of steam where prices could stand a stiff reigning in.   In Fredericton & Moncton prices have been rising, but as I mentioned at the top of the thread we are the anchor being dragged along.

We are continuing to look for properties and still find a few deals, however we are sticking to our local markets (NB, NS) as we have better knowledge of the economic factors at play.  It would be too risky for us to venture into southern Ontario at this point - someone like Doug, or yourself, who are local stand a better chance of finding the needle in the ever growing haystack.

If I were looking for rental properties in the GTA now, I would be conducting my analysis to confirm the property could carry itself under a 10-20% compression in rents and/or a property devaluation of 30-40%.   If you have an underwater property which can still carry its obligations and produce a free cash flow then you really do not care it is underwater - unless you plan to sell.

@Sergey S.

I think what the article is indicating is the opposite -  that rents are far below the norm relative to underlying property prices.  So, either property values must come down or rents must rise to revert back to the mean.  

I would advise going with the latter approach of obtaining positive cashflow, and forego appreciation assumption.  There'd be no fun in holding a property with both negative cashflow and it being underwater.  If you stick with areas outside of GTA such as KW, Hamilton etc should be OK.  

@Sergey S. - There are always at least two sides to a coin. In looking at the rent / house price issue, remember that both numbers drive the ratio but only one affects your cash flow (assuming financing stays the same). Rental rates for a given quality of product in the same local are much more a factor of income then anything else up to a point.

So forgetting about house value, the question becomes if rental rates decrease for what ever reason can you sustain the reduced / negative cash flow?

@Sergey S. , I believe that @Chad U. is correct concerning the rent vs house prices. This is further supported by the listings found on MLS, where the majority of rental properties are listed with a ratio of 0.5% (monthly rent vs price). At that ratio, it's pretty much guaranteed that the property will be cash-flow negative. I ran the numbers on several dozens of Montreal properties in the past couple of weeks and I would say that more than 95% don't show positive cash flow, and that's with interest rates at a historical low in the 2.5% range. If rates were to go up to, say 5%, an even larger number would not be cash flow positive.

I can't say for sure what the situation is like in other metropolitain areas, but most likely it's the same if not worse in the GTA area and Vancouver.

Canada and Australia are definitely the 2 markets where I am not bullish, in fact I would be bearish based on lower oil prices and commodity prices.  Good old USA real estate is still booming till 2022-2024.

I love the doom and gloom and talk. Look for opportunity in chaos....!

I live and invest heavily in the out skirts of the GTA. While I think the "Toronto" market is overpriced there is still some great buys in the surrounding areas. The first thing to watch out for is the Days on Market. Toronto is still sitting in at around the 28 days on Market. Which is a really strong sign of a good moving market. Next would be Sale to asking price. We are hovering at about the 99%-101% of asking. In areas like Newmarket, Aurora new home builds are very strong. In fact 1 min north of Newmarket they are building 15,000 new homes. Sales have just started and they are very strong. A lot of new people moving to the area. 

With the lower CDN dollar manufacturing is picking  up (slowly). Case and point, colleagues in the Industry are already seeing larger sales to the US. With the lower Oil prices, the talent we lost to the Alberta boom is already coming back to work in the Manufacturing or Natural gas sectors. 

Nah sayers have been saying the CDN housing market will bust since 2008-09, These are the same people that have books to sell on the same subject. 

Benjamin Tal is a decent economist to listen too. 

While I believe there will be a "market correction" in Toronto, I don't believe it will fall the 20-30%. We will likely see a leveling off in the Toronto area. Good markets to watch for are Barrie, Hamilton, Whitby, Oshawa. 

my 2 cents... 

One thing I'd like to ad is real estate is LOCAL. I invest in Canada and live in the US...and yes it possible to find cash flowing properties in growing Canadian just need to know where. I agree on many fronts of this thread, but remember Canada population and stats are skewed by Toronto and Vancouver...2 of the largest cities in the country.

Just to give you an idea, I just closed on a semi 136k that rents for $1200/mth plus utilities.

Vacancy rate: 2.2%

Population: 500k

Unemployment rate: 5.5

Do your homework and you can find deals!

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Originally posted by @Thomas Lorini :

Vacancy rate: 2.2%

Population: 500k

Unemployment rate: 5.5

Hi Thomas, would be interested in which city that was? Alberta/prairies? Just interested in finding out what other markets REI investors are active in around here. (Haven't met anyone yet here finding strong deals in Victoria LOL).

Originally posted by @Erich HD Schmitt:
Originally posted by @Thomas Lorini:

Vacancy rate: 2.2%

Population: 500k

Unemployment rate: 5.5

Hi Thomas, would be interested in which city that was? Alberta/prairies? Just interested in finding out what other markets REI investors are active in around here. (Haven't met anyone yet here finding strong deals in Victoria LOL).

 Hamilton Ontario ...surprised!?

Haha, yes a little!

Also, with regards to the original theme of this thread, here's a recent study comparing global housing affordability in the developed world, using 2014 Q3 data I believe. They basically compared median incomes to median house prices to get a ratio.

Haven't read it in detail, but the tables and rankings are super interesting to me. Most affordable? You guessed it, US midwest lol!

@Erich HD Schmitt

Note table ES-1 "Housing Affordability Rating Categories" in the paper you reference. The authors categorize housing prices at a median {household income} multiple of 5.1 or greater as Severely Unaffordable. While the authors rate Canada at 4.3 (seriously unaffordable), the MLS and Stats Can data have the national average in Canada last year at 5.7, with the GTA >7 and downtown Vancouver >11.

The RBC Housing Trends and Affordability Report is released quarterly and shows the % of housing costs as % of household income.

 In the March 2015 report, that percentage is currently hovering around the high 40s mark for 2-storey, and low 40s for a bungalow in Ontario.  As others have mentioned @Roy N. , @ and  @Doug Pretorius , these results are very likely province-wide averages skewed by the even higher percentages seen in Toronto and Vancouver.  Having grown up in Toronto, still living nearby and having friends who currently invest there, detached homes are in limited supply and that supply has been pent up for some years now compared to demand, while sustained demand due to added competition from foreign investors, local investors, and sustained low rates compound the rate of increase.  However, income is generally not keeping pace with increases in property prices, and the current housing to income ratios here are not generally sustainable in the long run. I think now is a great time to sell in Toronto.

@Gary McGowan , as a realtor, I'm wondering what your take is on Brampton, Ontario?  The City Council there just passed policies allowing legal second suites, albeit with gross floor area restrictions, it was the fastest growing municipality in Ontario from 2006-2011 (~20% growth) according to the 2011 census, and the province just announced last week a LRT connecting downtown to Mississauga and Brampton.

Updated over 6 years ago

*First paragraph: *housing costs as a % of total household income

Updated over 6 years ago

*Correction: First paragraph should read, "shows housing costs as a % of total household income"

Originally posted by @Erich HD Schmitt:

This is a related article that is very interesting. It discusses 7 different ways people have valued Canadian Housing, from the Fitch Ratings, vs BoC vs CMHC, etc.

@RoyN Table 8 also super interesting in previous discussed report: Moncton is in the top 10 affordable!

 Shhh!!!   Erich, that wasn't meant to be shared with everyone in central and western Canada! ;-)

@Michael Chow

For the past few years I have been telling people NOT to invest in Brampton due to the second suite confusion. Town Council members didn't even know what was going on. Legalization of second suites is a HUGE step for the city of Brampton. I still need to wrap my head around all the requirements behind it. I have always said when City's legalize second suites this is a Great thing. Newmarket has had second suite registry for many many years. When you have a property that is legal is valued 5-8% higher and will always sell quicker. 

I have owned single family homes in Brampton and have done well there. Appreciation was nice and the rents were avg. There is a lot happening in the city with growth. New hospital, homes, stores, infrastructure and as you pointed out transportation. 

Investors that take the time to understand the Second Suite Requirements  should do really well with a long term strategy. You will have some buyers today that will jump ship. So there could be an opportunity.