The whole world might be in a property bubble, but Canada is the second riskiest. That’s the take from Oxford Economics in their latest housing report this morning. Adam Slater, the firm’s lead economist, broke down fundamentals for global markets. He found double-digit overvaluations are widely seen these days. The firm believes a correction is likely to take place, but the longer it’s put off, the worse it will be. Canada is the second riskiest property bubble, only beaten by the Netherlands.
Global Home Prices Are 10% Overvalued
The whole world is overvalued — at least the parts where people eat and sleep. Global property prices are 10% above the long-term trend, says Slater. Using price-to-rent, they estimate the overvaluation rises to 11% for the global index.
Not quite at the pre-Great Recession high in 2006, but getting pretty close. They estimate the price-to-rent ratio reached 13 to 15% back then. However, a different set of economies appear to be at greater risk this time around, such as Canada.
Canada didn’t experience much of a real estate price correction during the Great Recession. The legend is this was due to the prudential lending of their banks, and rock-solid valuations. That’s not entirely true.
Markets like Toronto hadn’t recovered from the previous housing correction by then. On an inflation-adjusted basis, it was cheaper to buy in 2006 than it was to buy in 1990. It didn’t crash because it hadn’t recovered yet. Toronto is about a fifth of the country’s economy, so the legend became that Canada is bulletproof. Even though that wasn’t the take of the current central bank governor back then.
The Canadian Property Bubble Is The Second Biggest In The World
The firm ranked markets by their aggregate risk score, and Canada landed the number two spot. It set off alarms in three of the four key areas of overvaluation. Only mortgage credit growth didn’t trigger a warning. Though that might be due to how it’s measured, not the actual trend being healthy.
Housing Risks Vary Across Economies
Global housing valuation risks, with economies, ranked according to the average ranks across indicators.
Source: Oxford Economics, Jorda-Schularick-Taylor database, OECD, Haver Analytics.
Canadian mortgage credit to GDP only increased by 2.1 points from 2017 to 2021. It seems healthy-ish, until you realize global mortgage credit to GDP is under 70% these days. It’s a high level but under the 2008 peak. In contrast, Canada ended 2020 with a ratio of 112%, around 60% higher. The 2.1 point increase might seem small, but you’re talking about a country where mortgage debt is greater than GDP. Not quite the same as comparing more balanced economies, and it has a much different impact.
Global Mortgage Credit Growth
Mortgage credit growth across the 14 advanced economies.
Source: Oxford Economics/Jorda-Schularick-Taylor database/Haver Analytics.
That’s not even touching on the fact Canada’s GDP is heavily reliant on real estate purchasing as well. Mortgage credit growth drives a disproportionate share of total economic growth in Canada. In other words, mortgage credit is driving the economic growth it’s being compared to… and is still growing faster. No other G7 economy is even close to being as dependent on real estate. Canada is running the human centipede of economic models for growth.
The Global Housing Bubble Is Creating Two Large Risks
Slater warns the risks from the global home price boom are overheating, or a bigger price crash. Overheating would mean home prices push even further from fundamentals. That would make even larger bubbles than we’re currently seeing. Larger bubbles require more economically destructive corrections. “The two are not mutually exclusive,” he warned.
The economist believes a correction is the most likely scenario. “Our long-run assessment of the current boom suggests the risks are tilted to the second kind, i.e. of a big price reversal,” he said.
Stretched valuations make it difficult to see more home price growth, the firm said. “Duration dependence” is also becoming an issue. That’s the technical term for the longer an issue is delayed, the higher the probability it will occur. In other words, a price correction becomes more likely.
Keep in mind various economies are at various stages of their overvaluation. Riskier ones that have seen a bubble persist for longer are more vulnerable to a correction.
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Why are people surprised by this stuff? It’s like working out. The learners and more fit an asset class is, the stronger the performance.
If it gets slugging and bloated, it becomes more painful to catch up.
If it’s neglected to the point fundamental parts are failing, a couple of push-ups aren’t going to cut it. It’s going to be a little painful to get back to healthy.
Painful to get back to healthy, while half of your friends are telling you the failure of your organs is fine, just learn to love who you are.
Great comparison!
Oxford Economics is a top-shelf research firm. I’m a little surprised they don’t see the market more overvalued though, considering the IMF was so much higher.
IMF only did cities. I believe the report used the end of 2020 for valuations as well, so a combination of higher mortgages and home prices really taking off in Q1 would make it much more overvalued. The Q1 surge in the Fed article really shows how insane the quarter was.
40% in Hamilton, baby. Let’s goooo!
My home is still valued 20% less than the peak in 2007. I am in Edmonton. When interest rates are below inflation asset prices will rise. The insane borrowing by government is devaluating the currency. It’s the 70s all over again in my opinion. Interest rates rose but house prices still tripled
12% seems small, but I guess it’s the whole country. Probably a lot of markets that don’t need a correction, or are still undervalued faaar away from the city.
12% = 15% of gains. Another 3% wiped out by inflation, which puts us at 18%, then toss another 8 points in 2021 Q1 not included and you get the national price increase, possibly larger.
Inflation is really the saving grace most countries are depending on, but they’ll obliterate their budgets if they run it for more than half the year, and have to give raises to all gov employees.
Unless of course you keep tweaking your CPI to show inflation isn’t increasing….
The Toronto Police are also protecting the housing bubble by evicting the homeless and protecting the interests of the rich living in the affluent areas of Toronto.
Your name suits you.
Which begs the question “What’s the Netherlands like!?”
Canadian housing prices will never ever go down. They may pause and dip by a percent or two but they will never drop by anything significant. This is the reality of worldwide demand. If you’re not in now, get in or accept being a renter forever. We have the climate, the water, the social services and 400,000+ people clamoring to move here every year.
6-8% year over year increase forever.
6-8% is comical – expect 10-20% per year gains from here out. The QE trap doesn’t have an out, the time it takes house prices to double keeps shrinking…. last time it was about 4-5 years, next time it will be even shorter. I expect house prices in Canada to double by 2025.
Lol you’re an idiot. You clearly can’t do math, so allow me. The upper end of your prediction would require the average home price in Canada to hit $3,500,000 by 2030 and $21,700,000 by 2040. Ya, ok there, bud XD.
Rather be a renter for life than being tied down 50 years for a property that you have to upkeep. Your logic is flawed when there’s plenty of space to build here. There’s no chance housing prices will increase in perpetuity.
Plenty lands to build? You are naive. People with power can easily say “no builders can build on this piece of land” because we need to protect environment. Also people with power can easily stop issuing building permit by saying “not enough staff to handle paper work”.
You have not seen this before?
You have ordinary Canadians in slavery. Nothing to be proud about.
Monopoly on gas, shelter, any type of goods, internet. You name it.
You should not spend more then one forth of your income on housing.
In 1989 a lot of folks were also optimistic. Two years later prices dropped 30-40 % in Toronto.
The comment is arrogant. May be the house price will never go down which is unlikely. The house prices are artificially induced, and it has no bearing with the economic engine. It is all about affordability. The current value of the house price is rocket high, so, it is evident that there will be shortage of buyers in due course, and the consequence is, the seller have to wait many years to wait for the valuation of the house to inline with the economic engine. In short when people can afford.
May be the house price will never go down which is unlikely. The house prices are artificially induced, and it has no bearing with the economic engine. It is all about affordability. The current value of the house price is rocket high, so, it is evident that there will be shortage of buyers in due course, and the consequence is, the seller have to wait many years to wait for the valuation of the house to inline with the economic engine. In short when people can afford.
I don’t know, did they take into account all the money printing?
Got green card.
Moving South and getting house for half of Canadian price and 40% more income.
Average Canadian wage in Canadian dollars = $60,000
Average Canadian home in Canadian dollars = $800,000
Average Toronto home in Canadian dollars = $1,100,000
Average Toronto (city of Toronto) wage in Canadian dollars = $80,000
Wage to price ratio is far below today than in the 2000’s, 90’s , 80’s etc…, the vast majority cannot own a home unless they are willing to slave away their life for a 30 year mortgage.
You have to live somewhere. Houses seem expensive now… but 15 years into your mortgage you will be paying far less than market rent. So buy NOW! Dont be picky… go to the bank ask how much they will lend you, and go spend it on the first property you can score.
Not selling enough houses Bill?
Lol could he be more transparent? I think I saw him selling bitcoin back in 2017 as well XD.
Is that you Al Sinclair ?
“Buy the most house you can afford!”
“Buy the worst house on the best street!”
“Buy the…. what do you mean they’re not selling?”
Every realtor in America, circa 2007.
Same people probably said it would keep going up in 2017 before a 20% correction.
Are these people really that ignorant? Nothing goes up forever, nothing!
Does anyone know which day this is going to start? I need more information so I can plan accordingly.