While most reports and forecasts maintain the Canadian housing market will remain stable for the next year, reports are still surfacing that call into question whether the country will experience a housing bubble.
A new study of global housing markets by The Economist warns that markets in Canada and some other countries still appear "uncomfortably overvalued."
Overall, the report shows prices falling in eight of 16 countries studied in terms of a price-to-income ratio, which measures affordability, and a price-to-rent ratio.
By averaging the two readings, The Economist warns that prices are overvalued by 25 per cent or more in Canada, Australia, Belgium, France, New Zealand, Britain, the Netherlands, Sweden and the ever-unfortunate Spain.
Here's a really troubling bit: For Canada, Australia, Belgium and France, housing "looks more overvalued than it was in America at the peak of its bubble."
The magazine notes that some economists dismiss its measures, citing the fact that lower interest rates - Canada is such an example - can justify fatter prices because they allow heftier mortgages. The magazine responds to that just as Bank of Canada Governor Mark Carney and others have: It will not always be thus, and rates will inevitably rise.
Blair Anderson, broker/owner of Anderson Associate Mortgage Brokers in Burlington, Ont., thinks the comparisons to U.S. mortgage holders doesn't hold water. "I find it hard to believe their assertion that Canada has higher household-debt burdens in relation to income than America did at the peak of its bubble," he told MortgageBrokerNews.ca. "Having worked for an American finance company, I know the average American holds 10 credit cards compared to an average of five for Canadians. Americans are also encouraged to mortgage their homes to reduce income tax. This assertion might have more to do with the decrease in wages, and the increase in unemployment south of the border."
He also says that while prices may drop in markets such as Vancouver, overall affordability levels in Canada are "quite good and pose little threat to the overall demand for housing and this bodes well for property values remaining level."
David Larock, a mortgage planner with Integrated Mortgage Planners-TMG in Toronto, concurs with Anderson's assessment about comparing Canada to other countries. "I would reject comparisons between Canada and the U.S. or U.K. property bubbles because those countries were rife with bad lending practices that led to mass foreclosures," he told MortgageBrokerNews.ca. "Their property values have been pummelled to an extent that would be unlikely in countries which have maintained more prudent underwriting. Record-high Canadian debt levels are nothing to sniff at, but at least that debt is the hands of people who have proven that they have ability to actually pay it back."
But he does think home prices are over-valued. "Is Canadian housing over-valued? Probably. There is no denying that our house price appreciation has primarily been fuelled by lower interest rates over the last several years. Incomes have not kept pace with rising values, and while house price growth has historically tracked pretty closely with the rate of inflation, that has certainly not been the case for some time. I think that we will not see anywhere near the level of house price appreciation over the next 10 years that we have seen over the last 10 years. If we're lucky, we'll get slowing price appreciation, but if we're not, prices could certainly correct from current levels."
Ian Tenggardjaja, a mortgage agent with The Mortgage Professionals-The Mortgage Centre in Toronto feels the article is an oversimplification.
"To state that the Canadian housing market is overvalued by 25 per cent, is like saying the temperature in Canada is 20 degrees Celsius all across the country in December," he told MortgageBrokerNews.ca. "This is one of the limitations that one runs into when using national housing and income stats for one of the largest land masses in the world, which encompasses so many diverse regional economies. Another limitation being, a price-to-income and price-to-rent ratio, does not take into consideration other major factors that impact real estate prices such as; savings and investments that could be used for real estate, foreign investments into Canada, population growth and immigration. So while the analysis is perhaps interesting to read, it is of little or no use to determining our respective market conditions."
Larock believes that the positive momentum of the real estate market should continue for the foreseeable future for several reasons. "Mortgage rates look like they will stay low for some time yet, our unemployment rates are at record low levels, our immigration rates are at record high levels, and Canadians are, on average, paying off their mortgages more quickly than is required by their contract terms. Furthermore, every recent study I have seen shows that Canadians have capacity to pay higher rates, so it's not like our borrowers can't handle some bumps along the way."