Are Canadian House Prices a Bubble Ready to Burst?

Are Canadian House Prices a Bubble Waiting to Burst?Canada’s housing market is a bubble ready to burst as valuations have “lost touch with fundamentals” and household debt is at a record high, says a report by Capital Economics.

The independent research firm’s report says it fears that house prices could fall by as much as 25% over the next three years.

“House prices have been growing rapidly for nearly a decade now and it has reached the point where housing is so overvalued relative to incomes that a downward correction seems unavoidable,” says Capital Economics.

“Relative to disposable income per capita, our calculations suggest that housing is around 25% overvalued, which is approaching the level of excess that the U.S. market reached at its peak in 2006.” Click here to view the full article.

We have seen this prediction before – based on the idea that the ratio of house prices to disposable income is about 25% higher than historical norms and that we are therefore due for a 25% correction in prices. The price:income ratio is a very crude measure of affordability, however. A much better measure would be the ratio of carrying costs (mainly mortgage payments plus taxes), to disposable income and this ratio is pretty much in line with historical norms because interest rates are at near-record low levels.

It is expected that interest rates will rise gradually over the next 1-2 years, and so prices will probably level off as affordability is slowly eroded. The result will likely be a more balanced, stable real estate market than we have seen for many years, and this will be good news for buyers, sellers and real estate agents! So, the answer to the question: “Are Canadian house prices a bubble ready to burst?” is, in my view, emphatically NO!