Are Canadian Homes Overpriced by 25%?

Since the high in 2006, US housing prices have fallen by 34% to a low earlier this year. In Ireland, they tumbled by 45% from a peak in 2007. However, in Canada and a few other countries, housing prices wobbled a bit and then continued to increase. This information comes from The Economist. In a Nov. 26, 2011 article they warned:

“As a result, many property markets are still looking uncomfortably overvalued.”

The Economist has tracked global housing prices since 1975. Two important indicators are the price-to-income ratio which measures affordability and the price-to-rent ratio which guages the benefits of home ownership. When these two are well above average, housing is considered to be overvalued. The Economist estimates this overvaluation currently at 25% in Canada and several other countries.
Opposing economists argue that lower interest rates and rising populations justify the higher prices. However these excuses were used in US and Ireland, but did not prevent the dramatic and devastating burst of their housing price bubbles.

A compounding concern is Canadians’ higher debt burdens in relation to our household income. It is even higher than the American ratio when their housing prices were at the 2006 peak. However, The Economist’s article offers one slim ray of hope.

“Prices do not necessarily need to drop sharply to return to fair value. Adjustment could come through higher rents and wages. With low inflation, however, it could take a decade or more before price ratios return to their long-run average in some countries.”

I think the current cautions to the Canadian public about our growing reliance on credit are good warnings. Are you taking any measures to restrict your personal debt? Or are you in good shape? Or do you feel like it is hopeless?

Read the full article in The Economist: