By Tom Bradley
Last Sunday, while flying to the hottest housing market in Canada (Toronto), my airplane reading surfaced a couple more statistics about Canadian housing, both of which point towards caution.
In their quarterly report, Mawer Investment Management noted that an average home costs 84% more in Canada than the U.S. ($372,762 versus $203,100). Yikes, we complain about paying more on J. Crew’s Canadian website, but 84%?
Also in the briefcase was The Economist Magazine’s quarterly house price survey. In all the years I’ve been following the survey, I’ve never seen Canada featured so prominently. We were at the top of the list for 1-year price change (+7%) and near the top in terms of The Economist’s valuation measures. On price-to-income, our market is shown to be 32% overvalued and on price-to-rents, it’s 76% overvalued. Overall, the survey suggests that Canada’s housing market is 54% overvalued, only slightly behind Singapore, Hong Kong and Belgium. On the same measure, the U.S. market is 19% undervalued.
Also in The Economist was an analysis of Toronto prices over the last 5 years compared to Shanghai, London and New York. Toronto was up 32% in Canadian dollar terms, but 93% when adjusted for exchange rates. On the adjusted basis, Shanghai was up almost 150%, while the other two were down. What this shows is that Toronto has not only got more expensive for the people who live there, but has increased at triple the rate for foreign buyers.
The Economist’s numbers are rough measures of value, and like some others I discussed in my Globe column a few weeks ago (Real Estate as an Investment? Look Elsewhere) – RBC’s affordability index, home ownership ratio, mortgage rates – each can be explained, and maybe even justified. And each may or may not be representative of a particular local market. But what worries me is that there are so many valuation measures that are at extremes and they all point to lower prices in the future.
As my friend Francis Chou said in a recent report, “If there is a choice, it is better to rent rather than buy a house.”