Fitch Ratings – Canadian RE 20% Overvalued; BC 26% Overvalued

“American-based agency Fitch says house prices are overvalued by approximately 20 per cent in real terms across Canada, with regional variations.
But in releasing its ratings on Monday, it said Alberta’s market is overvalued by 15 per cent.
“Because of the effects of inflation and price momentum, it is not expected that prices would drop by this amount,” said the Fitch report. “If growth halted and prices began to drop, it would be expected to take several years for home prices to revert to their sustainable values, depending on a number of factors such as government support and credit availability. With this time frame, the actual observed decline in prices could be as low as 10 per cent.”
It said rises in prices have continued with small corrections since 1996, and specifically since 2008 have risen when underlying fundamentals suggest that growth is unsupportable.
It said the Ontario market is overvalued by 21 per cent, Alberta by 15 per cent, British Columbia by 26 per cent and Quebec by 26 per cent.”

– from ‘Canadian housing prices overvalued by 20%: Fitch Ratings’, Calgary Herald, 4 Mar 2013 [hat-tip Nemesis]

15 responses to “Fitch Ratings – Canadian RE 20% Overvalued; BC 26% Overvalued

  1. Seems like a pretty conservative estimate. But if BC is that overvalued, where does that put their estimates for Vancouver?

  2. Fitch must have read my Vancouver Sun editorial. So we need to deflate by 20-30%. Now the question is how fast we can grow incomes and rents. Inflation is at 0.50%, real GDP is at 0.80%.

    • There is definitely a possibility that a correction in real estate could equate to rising incomes in the medium to long term.

      Take a look at the anecdotes we now read, for instance the ones about tele-commuting and even flight commuting to Vancouver. On the surface it would appear that many high paying jobs are here, but incomes are not reported probably because the earners are permanents residents of another country.

      A significant correction could enable the wealthy to purchase in desirable areas and report some of those earnings, ergo raising local incomes.

      Second, Vancouver really is quite desirable. The issues are all about the affordability, I think a major reduction in housing costs can a bullish development for the city. Many business will have an easier time to attract talent and build a more thriving business sector here.

      Not to say there wont be pain in the short term. Without a doubt many people will get burned in the coming correction, from reduced commissions to job loss, to falling asset prices.

      • Real Estate Tsunami

        Burt, agreed.
        Short term pain for long term gain, with emphasis on short term pain.
        If we experience a long term contraction, rather than a steep and short one, we will find ourselves in a Japanese style of “lost decade” recovery, where businesses just muddle along.

  3. sniffingglueman

    The rating agency use these conservative estimates to sell mortgage backed securities and effectively making a bond look more attractive to unsuspecting investors. Please don’t put your trust in a rating agency.

    • Real Estate Tsunami

      They are just confirming what this blog has been saying for a long time.

      • This blog has been wrong for a long time…but on a long enough timeline, everyone gets to be “right” eventually, I guess. Everytime the market dips, the clairvoyants on blogs like this do cartwheels…

        I do find the “even at 40% it’s too much!” comments pretty amusing. You can get a large piece of land and house for under 350k still….no one is entitled to live in or around downtown van for pennies. Shocker, I know.

    • Real Estate Tsunami

      sniffingglueman!
      Any relation to Smoking Man?

  4. Burt,

    I manage a small office for a technically-related company here in Vancouver. Most of the professionals I’ve interviewed look at the cost of living in Vancouver and say “no way” or they are trying to get out of town. The only ones I’ve been able to hire look at their time here as temporary, a step in their career not a permanent relocation.

    The extreme measures people have to take to “get by” on 80 or 90K a year is absurd. I make double the median income and I can’t afford a house, even with a $250 K in the bank for a down payment. Note there is a difference between “can’t afford a mortgage more than $250K” and “willing to become slave to an $800+K mortgage like everybody else”. Even a 40% correction would put a mortgage out of the range of something I’m willing to take on. I don’t care how desirable it is here, people like me who are richer than a lot of folks in reality can’t afford to buy a house here. That means either rent or leave.

    The is no way around the fact the affordability gap created by the housing bubble of the past decade will have a lasting negative impact on Vancouver metro.

    • I agree on all fronts.

      I’m on record here with much of my personal situation.

      We earn an income close to double that of the “average” household income, and own a mortgage barely 2X our income.

      I am a young entrepreneur and have been self employed for few years now, I am well aware of the hardships faced by those that are motivated to achieve more.

      Whats of particular disappointment to me is what you had alluded to, the insanely high level prices are coming off from. Even with a mind numbing 40% fire sale most Vancouver properties are absurdly priced.

      That being said, I do think its possible for Vancouver to lift it self out of this via a combination of factors. We have always been a hot bed for tech in Canada, it would certainly help if we had a pro business government and competitive housing market. Given the chance many Canadians would live in Vancouver, just not at current costs.

      Instead of subsidizing homeownership with endless homeowner grants we need to focus on rebuilding our traditionally strong industries. Film, tech and resource come to mind as obvious candidates.

      I am curious in seeing what type of appetite there is in B.C for real change via creation of a legitimate third party? What we need is real leadership from some fresh new minds, I don’t think Liberals/Clark or NDP/Dix are able to offer compelling plans to growing BC’s economy.

  5. The IMF says Canada is only 10% overvalued. Now, a little while later, Fitch says it’s 20%. Pretty soon, it will be someone else that says 40%.

    • well, we’ll have to wait for Farmer and Ralph to weigh in with their rating, might be awhile, after they recover from the shellacking on those resource stocks they love so much.

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