Canada real estate neither overvalued nor having bubble

Canadian Housing Overvalued? Maybe Not

By David George-Cosh

If you’re following the headlines on Canada’s housing market—and who isn’t—you likely noticed the Organization for Economic Cooperation and Development described Canada’s housing market as overvalued and at risk of suffering a correction.

Not so fast, says Mario Lefebvre, director of the Centre for Municipal Studies at the Conference Board of Canada.

For the record, the OECD’s secretary-general Angel Gurria told Canada Real Time that Canada’s housing market was “overvalued”, but didn’t see a bubble in the sector and predicted prices would stabilize over time.

According to the OECD’s study, Canadian home prices are overvalued to the tune of 64%, the third-biggest overvaluation among OECD nations.

In a blog post on the Conference Board’s website, Mr. Lefebvre says the share of people in Canada born outside the country has skewed the OECD’s conclusions.

Mr. Lefebvre sees a relationship between markets with a higher share of foreign-born population and higher ratio of average house prices-to-average disposable income.

“In many instances, immigrants arrive in a new country with some pre-established wealth,” Mr. Lefebvre says. “If a specific market welcomes a relatively large share of wealthy immigrants, their arrival creates a new source of demand that not only stimulates demand for housing, but can also raise house prices significantly without any changes to personal disposable income per capita.”

Mr. Lefebvre looks at Toronto and Vancouver, two of Canada’s biggest cities, to illustrate his point. Both cities have a significant chunk of their population born outside Canada, and in both the gap between home prices growth to personal disposable income per capita is more than double the national average.

That segment of the population has helped drive home prices higher, but not to the overvalued levels the OECD is suggesting, Mr. Lefebvre says.

Don’t worry about alarmist economists — those at the Organization for Economic Cooperation and Development, for example, or Nobel Prize-winner Paul Krugman — who are predicting a real estate crash.

Because house prices in Canada are poised to edge up, not plunge down, according to a new analysis from the Conference Board of Canada. And Vancouver — despite having the highest real estate prices in the country, and despite being the target of incessant warnings from worrywarts who see a bubble poised to pop — will turn out to be one of the most resilient markets of all.

Vancouver’s steady population growth, in particular its unusually high percentage of foreign-born residents, is the basis of this confidence, said Mario Lefebvre, the director of the board’s Centre for Municipal Studies, in an analysis released on Thursday.

“The foreign-born population can significantly alter the landscape of a country’s housing market,” Lefebvre wrote. “In many instances, immigrants arrive in a new country with some pre-established wealth. If a specific market welcomes a relatively large share of wealthy immigrants, their arrival creates a new source of demand that not only stimulates demand for housing, but can also raise house prices significantly without any changes to personal disposable income per capita.”

This is true not only in our market, but also in another seven of the 27 countries that the OECD identified, using two different measures, as having housing stock that is over-valued by 20 per cent or more. (The others with demographics similar to ours are Belgium, Norway, New Zealand, France, Austria, Sweden and the United Kingdom.)

On the other hand, Krugman’s gloomy view, outlined this week in a New York Times opinion piece, echoes former Bank of Canada governor Mark Carney and others who worry that Canadians are too deeply indebted and over-leveraged to a dangerous degree.

The OECD concluded earlier this month that, nationally, Canada’s housing market is over-valued as much as 30 per cent, based on the ratio of house prices to disposable income, and up to 60 per cent if the comparison is to the historical value of rent. And it is a safe bet, I think, that Vancouver’s numbers would look even worse.

Consider how the prices of existing homes have increased here compared to other parts of Canada. Prices rose by an average of 5.2 per cent a year between 1981 and 2012 in the country as a whole, or 1.3 percentage points a year faster than average incomes. In Vancouver, however, the price increase was 6.4 per cent a year, and the income increase was just 3.5 per cent — 0.4 per cent less than in the country as a whole. As a result, the gap here was 2.9 percentage points — more than double the average for the rest of Canada.

Yet, in an interview after his analysis was released, Lefebvre was upbeat about Vancouver real estate prospects.

“You’ve seen some declines (in house prices),” he acknowledged. “But that seems to be slowly, slowly ending. You’re actually bottoming out.”

And he expanded on the reasons he thinks an upward trend will continue. It’s not just the steady influx of foreign money, he said, but population growth from any source at all — which could be good news for smaller B.C. cities like Victoria or Kelowna that remain a popular destination for retirees.

“As long as you have population growth,” he said, “people will need housing.”

For as far as Lefebvre can see into the future, he is confident Vancouver will continue to have population growth. And this region will continue to lead the way in attracting a steadily-expanding proportion of foreign-born residents, many of them arriving with quite a lot of money.

The bottom line: Most parts of Canada will see, very soon, a modest upward trend in housing prices, and those that don’t are unlikely to see anything worse than a small decline. Meanwhile, Vancouver is high on his list of the least likely places to see any problem at all.

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What can I say ? Well … Good luck, Canada.