House prices have become the steroids of the Canadian economy

House prices have become the steroids of the Canadian economy

Signs of the times (Image: coffeego) 

Two financial reports that came out this week confirm what everyone pretty much already knew: houses in Canada are overvalued. Basically, the reports argue that houses are like steroids: the country started relying on them to recover from a bit of a slump, but now the economy keeps going back to them for stimulation. They make it feel so strong. But if we’re not careful, the economy will come crashing down in a fit of hormone-induced rage and violent bacne. Observe:

Homebuyers paid about 14 per cent too much for their bungalows if they bought their home this year, according to the reports, one from CIBC and one from RBC. We love houses, and since the recession didn’t hurt us as much as other countries, we love buying houses.

“When it comes to prices, by almost any measure, Canadian home prices are overshooting their fair value,” CIBC senior economist Benjamin Tal said in the report. “The pace of appreciation has been quicker than justified by housing market fundamentals.”

According to the reports, this means the hot housing market is heading for a correction that will come from higher interest rates and an oversaturated market. Luckily, because Canadians are so chill, even our corrections won’t be too painful. According to the Globe:

CIBC World Markets economist Benjamin Tal said Tuesday that prices could decline by as much as 10 per cent in the next two years, but that a “violent” correction similar to the one seen in the United States remains unlikely.

Although the RBC report lists Toronto as one of the least affordable places to buy—apparently, it takes 49.1 per cent of one’s income to maintain a house here—we can wait out the higher interest rates in smug silence. After all, in Vancouver, home ownership consumes 73 per cent of pre-tax income.

• Overvalued homes higher mortgage rate drop resale market [Globe and Mail]
• House prices overvalued by 14 per cent in Canada: CIBC
• CIBC report [PDF]
• RBC report