Toronto Homes Among the Most Overvalued in the World

The Economist magazine has published a very cool interactive chart that allows you to see at a glance how home prices in major cities around the world compare to each other over the past 20 years, and how ‘overvalued’ they are in terms of the ratio of price to household income.

As you can see by clicking on the graphs for Toronto and Vancouver, Canadian home prices have gone from being undervalued in the 1990’s and early 2000’s to being among the most overvalued cities in the world today. The ‘tipping point’ was the 2008 Financial Crisis, when prices fell in the US in particular while we in Canada managed to dodge the bullet and saw prices continue to increase rapidly.

According to The Economist’s metric, Toronto and Vancouver prices are now approximately 49% and 65% overvalued, respectively, right up there with high priced cities such as San Francisco (+42%), New York +24%), Los Angeles (+51%), and Boston (+27%). Of course, some overseas cities are very much overvalued as well, such as Paris (+70%), Hong Kong (+94%), Aukland (+75%) and Brussels (+67%), but we are right up there in the top tier.

Clearly, house prices have inflated rapidly because of unnaturally low interest rates, and the Economist argues that, as interest rates normalize to more typical historical levels, the house price to income ratio will have to revert to the long term mean and, unless incomes rise significantly, this means that prices will eventually have to fall.

We are very likely heading toward a recession sometime in the next year or so (after one of the longest, if not the strongest, economic expansions in history), so it seems improbable that interest rates will increase significantly over the 2-3 years… so we may yet have a few years of strong, if not rapidly rising, house prices.