CANADA HAS BIGGEST HOUSING BUBBLE?

According to the March 31st issue of The Economist, Canada has the highest Price Bubble "Rental Ratio" in the World at 76!

Canada is 4th, behind Belgium, The Netherlands and France in their bubble"Income Ratio" at 32.

Singapore, Hong Kong and Belgium are the only places with a higher average "Price Bubble" risk ratio than Canada, which is at 54.

What does this really mean?

Is there a possibility that current prices could plummet 79% or even 54%? - NOT LIKELY!

Unfortunately, the Canadian housing market is quite different from most of the rest of the world.

RENTAL RATIO:

Our rental market is extremely small compared to most countries and we have powerful laws protecting renters and controlling rental rates. Even our rental properties are financed differently, with Landlords having to hold much higher equity levels than usual. Thus, our rental rates are lower than elsewhere in comparison to property values.

In recent years, our rental inventory has reached the end of its lifespan and many buildings have turned into condominium ownership. In fact, a large portion of rental properties have transferred into individual condo unit landlords from the traditional large apartment buildings.

Low interest rates and declining down payment requirements have transferred many renters into first time home owners. This has also helped to reduce prices than can be charged on older rental units.

These factors have produced an artificially high "Rental Ratio" in The Economist's index of Canadian housing prices.

INCOME RATIO:

Similarly, there are unique factors that cause their "Price to Income" ratio to be overstated as well. Since Canadians can not deduct home mortgage interest payments from their income tax, our incomes appear to be lower than Americans and others, because we pay more tax.

Also, we generally pay higher taxes anyway and this is a factor why our deficits are lower percentages of GDP than other nations in this survey.

Similarly, our house prices will have a natural tendency to be higher than other nations because we have greater equity in our homes and thus pay lower interest rates which combine to allow our prices to rise more than others.

Our homes are also much larger and better constructed to handle the needs of our climate. They cost much more to build, so our values will be higher.

Even our property markets are different in Canada. Due to our relative prosperity, our homes tend to have more updates and upgrades. (Have you seen the quality of homes on those British real estate shows?)

And finally, the demand for housing in Canada is very strong due to immigration and family growth. Vancouver has a shortage of land, so their price increases have been driven by real volume demand. Toronto is more spread out, but due to poor mass transit policies, the city core is quickly being densified. This is creating a normal price growth rate to balance supply and demand.

The Economist pointed out the 32% rise in the value of the dollar as a factor in their 90% value increase since 2006. I don't know where they got this figure, because Toronto prices rose 32.1% from 2006 to 2011.

In fact, the real value of the Canadian dollar should be more than 25% above the $US. (Canadians buying USA real estate are in fact earning a premium of this magnitude or better.) The USA is increasing their currency supply at a much faster rate than Canada is increasing our money supply. This is because there are very few large currency traders and most see the Canadian currency as a minor player in the global currency warfare underway at present. It doesn't cost our Central Bank much to maintain our currency close to the $US.

The bottom line for homeowners is that the report by The Economist is significantly flawed. Any price bubbles in Canada are more like FIZZ in sparkling water that will be easily absorbed by normal local market price adjustments. If a foreign induced housing price drop occurs, just sit tight for a winter of discontent, until we get our economy back on the tracks.