A housing bubble in Canada: Is it possible? (Part 3 of 10)
(Continued from Part 2)
Canada’s housing market is overvalued
On December 10, 2014, the Bank of Canada came out with its semi-annual report on threats to the Canadian financial system. The report noted that housing prices in Canada are overvalued anywhere from 10% to 30%. This posed an “elevated” risk to the domestic financial system.
The range is significantly higher than estimates by the IMF (International Monetary Fund). The IMF estimated that the Canadian housing market was overvalued by 10%. At the same time, the CMHC (Canada Mortgage and Housing Corp.) stated that there’s a “moderate degree of overvaluation” in the Canadian housing market. The CMHC is the Canadian government’s national housing agency.
In July 2014, Fitch Ratings said that the country’s home prices were overvalued by 20%.
Due to the persistent overvaluation in Canada’s real estate market, it became one of the most unaffordable places to live. Vancouver is the most unaffordable housing market in the world. It’s second only to Hong Kong.
Canada is seriously unaffordable
The annual Demographia International Housing Affordability Survey ranks real estate markets in Canada, the US (IVV), Australia (EWA), China (FXI), Ireland (EIRL), Japan (EWJ), New Zealand (ENZL), Singapore (EWS), and the United Kingdom (EWU). The survey calculates affordability. It compares median home prices with median incomes—the higher home prices relative to incomes, the more unaffordable the market.
According to the survey, Vancouver is the second most unaffordable housing market in the world—after Hong Kong. In Vancouver, median home prices were 10.6x higher than the median incomes in 2014—compared to 10.3x in 2013. In Toronto, the ratio was 6.5x in 2014.
The iShares MSCI Hong Kong ETF (EWH) tracks equity in Hong Kong. The iShares MSCI Canada ETF (EWC) tracks Canadian equity.
Overall, the study ranked Canada as “seriously unaffordable.” In Canada’s overall real estate market, homes are priced 3.9x median incomes. In the urban areas, the ratio inflates to 4.3x the median incomes.
So, what’s making Canada’s housing market so unaffordable? Is it the rising home prices or declining household income? We’ll find out in the next part of this series.
Continue to Part 4
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