Overvalued Canadian home prices could spell doom for the
housing sector, says Center for Economic and Policy Research’s Dean Baker. According
to a report,
Mr. Baker said that the Canadian housing market could suffer a collapse, much
like its American counterpart, if stringent measures are not taken to tighten borrowing
requirements. A Revere Award winner for accurately predicting the
speak at the Canadian Centre for Policy Alternatives conference in Ottawa.
Canada’s housing sector has not been severely affected by
recession and is performing quite strongly. In the light of this, Bank of
Canada hiked its policy rate by a point. Royal Bank and TD Canada Trust this
week increased the interest rate on 5-year mortgages to 0.25 of a percentage
point. While home prices have been overvalued for some time now, there has been
a sight correction in prices recently.
Dean Baker commented that there is no reason why Canadian
home prices should be 50% higher than the average prices in the
said that keeping in mind the lower average Canadian incomes and land values,
in comparison to those in the US, the home price premium is hard to justify. He
added that this price premium is indicative of problems in the Canadian housing
market. Mr Baker also said that Canadian debt to income ratios were close to
those in the United States during the housing bubble’s peak. A rise in interest
rates could mean a collapse in home prices to the tune of 30%, he warned.
Economist Benjamin Tal, however said that Mr. Baker’s
observations do not take into account the fact that most Canadians have
maintained 20% and more equity in their houses, unlike their American
counterparts, with 40% of homeowners in accelerated mortgage payment schedules
with their mortgage
lenders.
