Featured Weekly: IMF Warns Real Estate Prices in Canada Are Overvalued, Debt Debt Borrowers Now Have Record Market Share
It’s time for your cheat sheet on this week’s biggest stories.
Canadian real estate
Many Canadian real estate markets are massively overvalued, according to the IMF. Their model shows that Toronto’s estimated value is 28.2% lower than current prices. Vancouver’s estimated fair value is a smaller drop of 13.3% to its fair value. Montreal is going against the trend by falling within 1 point of fair value.
The most significant overvaluation did not occur in any of the typical global markets, but rather in a suburb of the GTA. Hamilton needs a 29.6% drop to get back to fundamentals. The organization does not predict when, or if, this will happen. However, the longer the inefficiency persists, the more severe the impact on the economy.
Canada’s over-indebted mortgage borrowers now account for the largest share of the loan originations on record. OSFI, the country’s banking regulator, monitors heavily indebted borrowers. In the fourth quarter of 2020, this segment of borrowers exceeded the peak of the share of 2017. When the problem reached this level in 2017, the regulator tightened mortgages. The low rates wiped out the effect of the new measures.
Arguing when the Canadian housing bubble started has become a national pastime. This is because there are two different bubble criteria that are met. The latest is a bubble on a bubble.
In 2013, even the Bank of Canada warned of a real estate bubble. This is because affordability has been stretched. These issues were never resolved, but instead the affordability criteria were changed. Today, Canada has a cultural bubble, which spills over into suburbs and small towns. Everyone in the country thinks that someone will be lining up to buy their house at any price. That’s the definition of the biggest fool theory.
The Government of Canada has said categorically that it will not consider taxing home equity. The minister in charge of housing said: “Our government does not think, does not envisage … or does not bring tax on the equity of the home.” He continued with, “Any suggestion is wrong… we have clarified it a number of times.”
The statement follows increased calls to tax home equity, as a “chill” measure. It also comes just days after the industry said it would “shut down” the discussion.
Canadian homebuyers are buying the hype, and it’s costing them hundreds of thousands more to buy a home. Due to the common practice of blind auctions, buyers have to guess how much the other person is bidding. This sometimes causes people to bid more than ask, even if there is only one other person they are bidding against. Diving into the data, agents who tried to start a bidding war in February only found buyers half the time.
The affordability of Canadian properties deteriorates towards the bubble levels of the early 1990s. According to RBC, a median household buying today must spend 50.3% of their income on mortgage payments in the fourth quarter of 2020. That’s just below the previous high of 2018, but prices have increased significantly since the end of last year. This probably means that we have passed the peak of 2018, at much lower interest rates. The benefits of lower mortgage rates have been more than eroded by rising home prices.
Canadian home prices are the most overvalued in the G7, price-rent ratios show. The IMF index shows a reading of 128 in the second quarter of 2020, which means that the gap between rents and house prices has increased by 28% since 2015. This is the highest number of any country in the G7 and almost twice the average of the G7. Canadian home prices have the tightest valuations compared to G7 rents.
A record number of Canadians want to buy a home this year and believe the prices will go up. Mortgage Pros Canada’s annual survey shows a record average score for intention to buy a home. Their chief economist says this tends to foreshadow increased home sales. The survey also found that people are expecting a record increase in house prices. The data shows that the expectation of a price increase has no connection with future price growth. Instead, it’s closely tied to what just happened, and people predict it will happen again.
The National Housing Agency of Canada sees high risks in many real estate markets. The organization now has five of Canada’s largest markets, designated as “highly vulnerable”. In the previous quarter, the number was only two markets, so things are getting worse. Among the riskiest markets according to the agency are Toronto and Hamilton. The concentration of three markets in the same economic region is particularly problematic.
Toronto Real Estate
GTA new home sales have fallen sharply as pent-up demand is released after a hot year. There were 3,240 new homes sold in February, down 34.1% from the same month a year earlier. The substantial decline was largely attributable to lower sales of condominium apartments, primarily in the city of Toronto.
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