Shinier Than Should Be: Canadian Real Estate Majorly Overvalued – Economist

Published August 20, 2018 by Real Estate Leads

Real Estate and Conctruction Market Going Up. Bright Sunny Real Estate and Economy Concept 3D Illustration.It’s been long understood by nearly anyone with any level of interest in real estate investment that Canada’s real estate has become something of a bubble, and one in large part fuelled by speculation and a housing inventory that is seemingly always dwarfed by the demand over recent years. There are many factors that make Canada unique in the way it is at the mercy of market economics in real estate, but the simple and most plain truth is that homes have and continue to be sold for prices that many would deem to be completely out of touch with what the real value of many of these homes should be.

For real estate agents, there’s no debating that this is truly something of a golden goose in the way elevated sale prices mean larger commissions for realtors in Canada. Most will be equally aware that this goose was not something to be relied upon for any indefinite period of time. Things change, and in many ways they have make quite a marked departure already.

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Back to our discussion regarding overvaluation; A new global price analysis put out by The Economist ranked Canada as the 3rd most overvalued country in the world in terms of housing values, coming in just behind New Zealand and Australia. The study measured the average housing price versus the median incomes of 22 major global markets, and came to the consensus that Canadian real estate is valued some 56 percent higher than it should be.

Not surprisingly, Vancouver is the Canadian city leading the charge in these overvaluation rankings. The fact that homes there were priced 65% higher than they should be based on local incomes is a very telling indicator. The average housing price in the city has increased by around 12.3 percent annually since 2011, and then by 60.4% over a 5-year period stretching back to the midway point of 2013.

Lotus Land (as Vancouver is called by some) was ranked the 5th most overvalued metropolitan real estate market worldwide, with only Hong Kong, Auckland, Paris, and Brussels being more so. It’s well established that the past few years have seen rising prices and increased inflows of foreign capital establishing Vancouver’s real estate segment as a vital component of B.C.’s economy, but that comes with some very pronounced inherent risks.

A recent FINTRAC report cautioned that B.C. properties are particularly vulnerable to money laundering. The report found that approximately 88 percent of real estate entities in the province have had insufficient anti-money laundering controls in place for years, and continue to make progress in getting up to snuff in this regard.

Risk assessment, client identification, record keeping, and reporting policies and procedures were spotlighted as specific areas of weakness. Money laundering via real estate is a very real and disappointing phenomenon, with widespread property speculation being blamed for the skyrocketing of Vancouver housing prices.

Nearly all ethical professionals in this business will believe in and work around the principle that homes are for housing families, and as such it is hoped that these illicit and very harmful practices are eventually disabled in the housing market in Canada. It will be better for everyone.

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