Canada with 2nd Most Overvalued Real Estate for Country with Advanced Economy

Published March 21, 2022 by Real Estate Leads

If there was any dispute about homes in Canada being valued at more than they are truly worth, there isn’t anymore if a new report from the Organisation for Economic Co-operation and Development is to be taken at face value. Many people will suggest – with some merit to it – that a home is like any other consumer product in that it’s real value is what someone is willing to pay for it. But the real estate market is different and primarily because so much of this country’s GDP is actually in real estate, and that’s to say nothing of all the lesser factors that are factoring in too.

It is also true that homes have their value inflated unnaturally here in Canada simply because new housing starts are nowhere near keeping up with immense population growth, and that is doubly true for cities that are desirable for job opportunities, cost of living, and the natural environment. This is something that is very different from other countries, and very notably our neighbour the USA to the South.

Real estate agents do better for themselves when houses sell for well over asking, but most realtors are also aware of the negative realities of when houses are overvalued and people who would be qualified buyers in any other country are not able to get into the market here. We will also say that most realtors are civic-minded people who realize that home ownership allows people to be more solid fixtures when contributing to a community. Acquiring new clientele can be more challenging these days, and our online real estate lead generation system here at Real Estate Leads is a great way to gain an advantage there.

Back to topic, let’s look what this OECD report is detailing exactly and how it highlights how Canada’s housing market isn’t in the best of health overall with homes that are overvalued. So much so that only one country – the Netherlands – overall has homes that are more overvalued.

House Price to Income Ratio

One of the fundamentals of housing affordability is the house price to income ratio. It’s the ratio of the market price of a typical property based on the share of household income. An upward trending ratio will indicate that prices for homes are outpacing median income growth, and the result then is always worsening housing affordability for the average citizen. If the ration is going down then incomes must be outpacing home prices, and housing affordability is improved as a result.

The OECD created an index for cross-country comparison. By setting 2015 at 100 and the indexed value from that period indicates the changes and variances. An index of 110 would indicate home prices have grown 10% faster than household incomes between 2015 and today. An index of 90 would mean incomes gained 10% on home prices. The hope here is that by measuring the rapidity with which these metrics are changing, the problem can be addressed before it becomes a runaway one.

Surging Canadian real estate prices over recent years are not due to an income boom. The index reached 141.9 in Q4 2021, which shows us that from 2015 incomes trailed home prices by 41.9%. And home prices have more than doubled the pace of income growth over the 20+ years since 2000. It is interesting to note that these house price surges are being seen in most advanced economies. The situation in Canada, however, is different and one needs to keep our smaller overall population in mind first and foremost there.

Canada Outpacing USA

If we look at home prices in the USA it puts the situation in even more pointed perspective. The US house price to income ratio index went up to 130.5 for the 4th and final quarter for 2021. Since 2015 there home prices grew 30.5% faster than incomes but if we then look at the similar since-2000 number it’s only around 23%.

The important takeaway here is that Canada’s gap between home prices and incomes grew almost 5x faster than the US over the last 20+ years, and that’s not something that should happen naturally. And of all G7 countries Canada has the most overvalued real estate according to this report. The disconnect here is fast growing, and the fix for all of this is something that decision makers in Ottawa are obviously struggling with.

We need to understand further that Canada’s very large gap is due in part to the extent of time it has gone on. Following the central banks overstimulating markets in 2020, price surges have been observed nearly everywhere. But in Canada it has been a different story, starting with bering flagged by the US Federal Reserve back in 2015 for housing exuberance. Home prices have been on an expressway for almost half a decade, and unfortunately the wider this gap becomes, the more difficult it will be to effectively remedy it and make houses more affordable for larger numbers of people.

Which will also promote a better working environment and a more suitable type of qualified-buyer client base for the real estate agents like you who will be reading this.


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