The Bank of Canada Governor Stephen Poloz stated last month that this country’s housing market could be overvalued by as much as 30%. This may very well be true, but it’s nothing to be alarmed about. 😉 In fact I would be really surprised if our real estate market was not overpriced given what’s going on in the rest of the economy. Toronto’s real estate has increased almost every single year for the last 19 years, except in 2009.
A large part for the seemingly illogical run-up in real estate prices in Canada, the U.S., England, Australia, and parts of Asia over the last 2 decades, can be rationally explained by TINA, which is an acronym for There is No Alternative, a term first made popular by Margaret Thatcher. It’s the same reason North American stock markets reached all time highs at the end of 2014. 🙂 The Canadian Stock market is currently overpriced by more than 20% according to historical averages. The S&P 500 stock market index in the United States currently has a P/E ratio of 20. That’s 25% more overvalued than the historical average P/E ratio of around 16.
There has to be more sellers than buyers for prices to drop. But many home owners view their properties as investments. And if they sell their homes today they won’t have a viable alternative for all that cash. Both stocks and bonds are overvalued too. By comparing a 20 year real estate chart like the one above, to a 20 year stock market chart it’s easy to understand why most Canadians would rather own real estate, even though it’s overvalued by 10% to 30%, than own a basket of volatile stocks that can fall 50% in value during a recession.
This is why real estate prices are so high. There just isn’t anything else that’s more attractive for investors out there. The investment options outside of Canada don’t hold a lot of promise either. The labor force participation rate in the U.S. is at a low which hasn’t been seen since 1978. Europe is still fighting disinflation. Brazil’s GDP has hit a brick wall. India is trying to contain its inflation. China’s growth rate has been slowing for years. And there are all sorts of political and economic problems going on in Russia right now, including an oil revenue crisis.
So with no good alternatives, home owners who don’t have to sell their properties will continue to hold onto them. Meanwhile first time home buyers are entering the market all the time. Since demand is stronger than supply, it’s only natural for the price of real estate to move higher. Overvalued doesn’t mean imminent correction if everything else is overvalued too because all markets are relative. 🙂
Random Useless Fact:
Random Useless Fact: