According to Deutsche Bank, homes in Canada are 63 per cent overvalued, due in large part to high levels of household debt. However, some industry professionals question the methodology used to arrive at these estimations.
“Many of these groups who measure housing value are simply holding up housing cost vs. income and the answer is always, ‘yes, Canadians have become accustomed to being house poor,’” Layth Matthews of Rate Miser Mortgage Advisors wrote on MortgageBrokerNews.ca. “But the missing piece is that housing inventories have been managed very carefully here in recent years, which explains why we have the other cadre of forecasters talking about housing shortage.”
The Bank of Canada recently weighed in on the matter and stated house prices are overvalued by 10-30 per cent, which is in line with various other institutional estimations.
TD Bank and the International Monetary Fund (IMF) both believe Canada’s house prices are overvalued by ten per cent; Fitch Ratings suggest they are overvalued by 20 per cent and The Economist believes the figure sits around 30 per cent.
But is there a better way to estimate overvaluation? One broker believes the key lies in construction costs.
“If you want to know if real estate is overvalued, then compare it to reconstruction cost for the same region. If reconstruction with same features is about the same then it's not overvalued,” Walid Hammami, a broker with Dominion Lending Centres
wrote on MortgageBrokerNews.ca. “See how much builders are making and then come up with a conclusion.”
BoC joins the housing overvaluation discussion
The ever-popular discussion about just how overvalued Canadian housing is has received its most gloomy prediction, which has sparked discussion about the accuracy of the methodology used to arrive at these figures.