Maybe Prices Aren’t Going To Drop THAT Much

Yesterday I discussed a report that suggested that the Canadian housing market was due for a big price correction. The primary piece of evidence used by the research firm Capital Economics was that the ratio of house prices to disposable income per capita was 25% above their expected levels, according to the company’s calculations.
In my opinion, the evidence certainly suggests that housing in Canada is less affordable than it typically has been. An alternative measure of Canadian housing affordability, the Desjardins Housing Index, currently puts housing affordability roughly half way between the historical low in affordability experienced in 2008 and 2009 and the most recent high we experienced in Canada in 2010.
On the other hand, the evidence suggests that, on a nationwide level, a 25% correction seems a bit high.

The chart shows, for a given region or city in Canada, the percent of pre-tax income a household must devote to homeownership costs (including mortgage payments, utilities and property taxes). The first column is the current affordability level, the second is the average level since 1985 and the last column the difference between the two. What we see is that for Canada, and most regions within Canada, current affordability is very close to its long-term average. Fear of a national bubble seems driven mainly by local bubbles in Vancouver and, to a lesser extent, Montreal. While a housing bubble bursting in any of Canada’s major cities is bad news and may negatively affect all of us, fear of an across the board price correction of 25% seems, at the moment, misguided. As conditions change, so may the predictions. For that reason, it is always best to get as much information as you can before a major real estate decision, beginning with a qualified mortgage broker.