‘The Economist’ “Home Truth” – “Overvaluation is especially marked in Canada.”

“Overvaluation is especially marked in Canada, particularly with respect to rents (78%) but also in relation to income (34%). Mark Carney, the country’s central-bank governor, who is soon to jump ship to join the Bank of England, where he takes over from Sir Mervyn King in July, may have shown good market timing with his move to London as well as a deft hand in negotiating his lavish remuneration. …
At some point, central banks will have to take away the balm of easy money. If housing markets remain so fragile when they are getting so much help, they may break when it is removed.”

– from ‘Home truths’, The Economist, 12 Jan 2013

And Vancouver rent and income ratios are far more extreme than the national averages.
– vreaa

‘The Economist’ has steadily been warning of a Canadian RE bubble for some time:
‘The Economist’ – Rental Income Shows Canadian Home Prices Are 71% Overvalued, 25 Nov 2011

32 responses to “‘The Economist’ “Home Truth” – “Overvaluation is especially marked in Canada.”

  1. 71% overvalued, that is a statement I can get behind especially in bpoeville.

    • Yeah, and for bpoeville the number is higher.

    • I think the Economist measure is overstated but FWIW I think Vancouver condos are 70% overvalued (well maybe 65% now) and I expect a price-rent reversion of about 40%, with rental gains making about 20-25% of that. Things may overshoot but I would not count on it. SF/Seattle are some examples of what I might expect as plausible. San Diego is likely more extreme than Vancouver.

      • So, a soft landing?
        😉

        Kiddin’, of course.
        But you do foresee smaller price drops than I do.
        The big factor that would make the difference between price drops of 30%-off versus 50+%-off would be sentiment, and herd behaviour on the downside. We suspect strongly this will come into play as it all unwinds.

      • Cyril Tourneur

        YVR Housing, On what basis do you see rental rate gains of that magnitude?

      • I’ve been looking at Craigslist rentals for a long time. What I see is that reasonably priced units move quickly and there is a lot of competition. But landlords trying for a rent that’s comparable to what the mortgage payment would be see their places sit, and sit, and sit, so that you’ll see those same places posted for months on end. Eventually, they start dropping the prices and the listing disappears; I presume many have found a price that someone will rent at.

        What is reasonably priced? We’ve been looking for a 3-bedroom house in several neighbourhoods close to downtown (mostly East side). A nice house place will go quickly when priced from $2,000 to $2,400. Any higher and they don’t go anywhere.

        Witness this perfectly nice home in the Main St. area for $2,800. I’m sure a mortgage payment for this place would run at more than $4,000/month. I first noticed this listing two months ago:
        http://vancouver.en.craigslist.ca/van/apa/3512455779.html

        These guys in Burnaby have posted every day for three months, with the price dropping in $25 increments. I believe they started at $2,300:
        http://vancouver.en.craigslist.ca/van/apa/3543239162.html

        This “Spanish villa style home” for $5,000/month (in Marpole!) has been kicking around since at least October:
        http://vancouver.en.craigslist.ca/van/apa/3520644855.html

        I could list at least a dozen more examples. The fact is, there is a limit to what people can pay. The only way they’d pay more than that is fear of being “priced out” or the promise of future gains if they buy.

        I really don’t see how rents could go up 25% in the short term. Speaking for myself, if that happens, it will be the straw that makes us leave the city.

      • Real Estate Tsunami

        We are renting a house in Richmond (appraised at 1.1 million) for $1,500.
        The landlord has not raised the rent in the 3 years that we lived here,
        because are good tenants, but also because he knows we’d move out.
        Also, many would be sellers have taking their properties off the market and are now renting them out until the markets improve.

      • To clarify, I see 20-25% of the 40% drop in price-rent coming from increasing rents, the remaining 75-80% from changes in prices. That’s assuming a lot but -30% nominal doesn’t seem to far off the mark for me. But what do I know!

    • @yvrhousing:

      Why do you think the rents are going up? In almost 20 years I can’t remember a time when I’ve seen so many for rent signs when you walk around Vancouver. I would have to think there is some serious downward pressure on rents right now.

  2. The Economist: right about Canada’s RE overvaluation, wrong about ranking Vancouver so highly on their “liveability” index. Apparently they haven’t figured out that liveability includes access to reasonably-priced housing.

  3. Real Estate Tsunami

    Carney “soon to jump ship” So true. Only the ship is no ordinary ship.
    It’s the Titanic. I’ve been reading The Economist for over 30 years, and I have always found their research and analysis always impeccable.

    • UBCghettodweller

      Despite annoyingly being the voice of the City of London financial sector at times, their commentary and analysis is uncanny in its accuracy and insight most of the time.

      • Real Estate Tsunami

        UBC,
        Agreed. Only recently have they begun to acknowledge that maybe the Teutonic Business Model is not so bad after all.

    • Me too…..been reading the Economist for about 20 years, and Forbes (for example) for about 30…………..there is a reason you always pick certain periodicals to refer to…………because they are well written and well sourced.

  4. Funny how everyone else can see Canada is poised for a major real estate correction, yet the main stream media keeps putting so much stock in the opinions of bankers, real estate executives and other self-interested parties.

  5. Ah yes, the “balm of easy money”…

    One minute you’re a ‘respected professional’… and the next thing you know… even your beloved monkey is ratting you out to the press…

    [G&M] – IKEA Monkey Relates Shocking Tales of Abuse

    …”Ms. Nakhuda, a real estate lawyer, …introduced to an illegal exotic animal dealer by a client – tried to return Darwin after a few days [after initially balking at the $10,000 price tag]… but she decided to pay and to keep Darwin after the dealer showed her how to abuse the monkey so he behaved, the sanctuary alleges. …They have strangled Darwin, hit him in the head and face, used a wooden spoon to hit him, forced him to live in a small dog crate, failed to change his diaper for up to three days and failed to comply with standards of care for captive primates”…

    http://tinyurl.com/by7dv7d

    [NoteToEd: According to Darwin, as painful as his brief association with Nakhuda was – he nonetheless considered himself incredibly fortunate to have avoided the sort of depradations typically experienced by her clients, “I may be just a Macaque, but even I know that nobody pays anything close to ask for a condo in HogTown anymore.”]

  6. I love that cartoon! That is hilarious

  7. the dogs in Victoria are loudly proclaiming the negative effect of housing transaction tax. http://www.timescolonist.com/news/local/monitor-that-property-transfer-tax-1.46183

    • Real Estate Tsunami

      With the sharp drop in sales, we will soon hear the Government lamenting the loss of tax revenues, which will lead to further fiscal tightening or tax increases.
      This over-reliance on RE as a major contributor to GDP and general tax revenue will worsen the economic outlook, and by extension, the outlook for RE.

  8. Me wondering what Tsur et al (Centre for RE blah..blah), Benjamin et al would have to say about this piece of analysis by The Economist.

  9. Real Estate Tsunami

    Any “Flat-Liners” still out there.

  10. Lifetime Renter

    Based on the popping of other extreme housing bubbles, the crash, particularly in the Vancouver area, will be extraordinary if it follows the usual pattern:
    1. An end to speculation. Both conscious speculators and those who saddled themselves with massive debt or purchased inadequate housing because they expected prices to continue to rise. Falling prices destroys the speculative impulse.
    2. A severe contraction in the construction of housing. Felt most once projects underway are completed and few new projects begun.
    3. An end to spending based on home equity loans and a feeling of ‘wealthiness’ wrought by extremely high property values. In Vancouver include a decline in the flow of nouveaux riche with their penchant for conspicuous consumption.
    4. Significant job loss in the private sector beyond those in construction and real estate.
    5. Government insulating banks from the effects of the crash. CMHC backstopping is already in place to ensure this happens. Governments of all political stripes will pay for this through public sector job and wage cuts. Public services will be privatized to provide new opportunities for capitalist investment to replace the loss of the housing sector. This will add more housing to the market and further decelerate demand.
    There are factors that may soften the crash (an uptick in demand and prices for basic commodities, government efforts to re-inflate the bubble). I doubt these factors are enough to make a significant difference.

  11. What do countries with the highest household debt have in common? Link

  12. I know it’s waaay too early to talk about the bottom, but a thought occurred to me (so I’m having it tickled).

    I think that it’s far easier to “time” the bottom than the top. But mostly by accident (at least in RE). I could be wrong, but it seems to me that there’s at least been a few articles in the last few years calling for a “bottom” to the US housing market when in hindsight, it’s obvious that it wasn’t bottom (at least for those markets).

    Maybe it’s a combination of human optimism and permabulls/RE-pumpers in the mainstream (hey, who doesn’t want to hear about gains gains gains right?), but it sure seems like there’s more encouragement to “buy” in RE even as the chips fall.

    I wasn’t paying attention during the last bubbly crash, but did that “optimism” show itself in Vancouver RE towards the bottom?

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