I was at a dinner party recently and the topic came up; “We’re renting, just waiting for property prices to tank” said Bruce. “Well this house has been our best investment ever, we built it 14 years ago and have watched it go up every year since” quirked Janice.
The debate on peaking property prices is now commonplace as we all wonder just how much longer we can expect things to remain good when so many countries have experienced such dramatic property price destruction.
The so called double dip in US home prices is here. On average home prices are selling at the same values that they were nine years ago, which are 34% below their 2006 peak. (Source: S&P’s HousingViews blog).
The Standard & Poor’s/Case-Shiller 20-city housing Index shows that the housing market remains in a protracted and horrendous bear market wherein housing prices have continued to fall.
Case-Shiller noted that prices fell in 18 of 20 major cities in the US in March and of those 18 the prices in 12 of them fell to levels not seen since 2006.
This is not good for US banks, among others. S&P calculates that a double dip in home prices could cost US banks an additional $70-80 billion in loan losses.
The man who called the last two bubbles, Mr Baker, calculates that U.S. home prices still have 10% to drop. He wrote; “given the continued near-record vacancy rates and huge inventory of homes in the foreclosure process, there is no reason to think that house prices will stop falling anytime soon.”
But what of Canada’s real estate market? He said; “I would be very wary in markets like Canada. In fact, I would be very, very wary.” (G&M June 4th 2011)
The Economist magazine’s latest survey of global home prices claims that Canadian real estate is overvalued by a staggering 23.9 per cent.
The Economist determines fair value by comparing the current ratio of house prices to rent with the long-term average, which is one of the major, fundamental determinants of house prices.
By that measure, Australia led the way among the overvalued markets, with homes 63.2 per cent more expensive than they should be, followed closely by Hong Kong, where the housing market was 58.1 per cent overvalued. By comparison, the Economist says real estate in the United States is undervalued by 2.1 per cent, and houses in Japan are 34.6 per cent cheaper than their fair value.
The magazine says Canadian home prices rose by 4.5 per cent over the past year, and gained 70 per cent between 1997 and 2010.
Canadian real estate has become very expensive as evidenced by the ‘house price to income’ ratio, which is at its peak, 40% above its long term average. The translation is that our houses are too expensive relative to our incomes.
The United States had a similar spike only to have this ratio fall back to normalized levels and we should expect that Canada will be no different.
We recently featured the TVO Agenda program that made a strong case for renting given the many hidden costs of home ownership and demonstrated the rates of return of equity markets clearly favor not owning a home, see “A case against home ownership”.
The April 2011 issue of the Toronto based Post City Magazines, published the result of a roundtable discussion on the future of our real estate market. There is no mentioning of science or complex mathematical modeling; however, the discussion is diverse and informative. Click here to read the full story and then decide for yourself.
A December 2010 report on Canadian home prices concluded that;
‘Though overpriced, the absence of widespread speculation and egregiously loose credit standards suggests the market is not in a bubble. Instead, Canada’s housing market remains reasonably affordable because of exceptionally low interest rates. Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur. The greater risk could be that sustained low interest rates might recharge the housing market and inflate a true bubble that ultimately bursts when rates normalize.’
(Source: TriDelta News)