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PETER DOLEZAL: House prices defying gravity?
The Jan. 4, 2014 issue of Economist magazine featured an interesting article on the degree by which house prices world-wide are over-valued or under-valued. The conclusions were based on the relationship between house prices and the disposable incomes of each nation’s citizenry.
By that measure, the Economist ranked Canada, of the 23 countries compared, as having the second-most over-valued residential real estate — 31 per cent higher, on average, than justified by our incomes. Only Belgium’s prices showed a worse result.
By the same criteria, U.S. housing, having lost more than 30 per cent of average value between 2007 and 2010, and only recently rebounding, is still considered as 10 per cent under-valued. Nationwide, the U.S. median price of an existing single-family home stands at $207,000.
By comparison, while median prices are not available, Canada’s average price stands at $392,000.
All Canadians should take notice of such wide home-price disparities, particularly when measured against the United States. How can we rationalize sustaining Canadian prices at levels almost twice those of our southern neighbor?
Victoria prices, even though currently back to levels of five years ago, remain well above the already-high Canadian average. Vancouver, by any measure certainly Canada’s least affordable city for housing, has the dubious distinction of being among a handful of least affordable cities world-wide.
Do we have reason to worry about a house price collapse in Canada? If so, Vancouver, Victoria and Toronto are clearly the most vulnerable areas. The Federal Minister of Finance and the Governor of the Bank of Canada, having expressed ongoing concern over the past several years, have engineered tougher mortgage lending rules in an attempt to deliver a “soft” landing for the housing sector.
Whether the landing will be “soft” or “hard” no one really knows. However, those who continue to predict no end in sight to Canada’s rising house prices are likely deluding themselves. There is no reasonable basis for predicting a continuing house price uptrend in the next few years.
Real estate pundits, particularly those in the industry itself, continue to minimize the risk of Canada’s experiencing, to some degree, the melt-down in the U.S.. We can only hope these optimists are correct. We should be satisfied if instead we see prices stagnate for a number of years until housing affordability returns to a reasonable balance.
Government continues to monitor the situation. Should Canadian house prices not moderate, the government and the Bank of Canada will apply the brakes with either tougher lending rules, increased interest rates, or both.
Whatever the outcome, we should not expect house prices to increase much above the level of inflation — if at all.
Peter Dolezal is a retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca).
Contact Panorama Rec. Centre to register for Peter’s Elder College Spring session – Financial and Investment Planning for Retirees & Near-Retirees (Wednesdays, March 19 to April 16).