The whole world might be in a property bubble, but Canada is the second riskiest (only beaten by the Netherlands) according to Oxford Economics which believes a correction is likely to take place and the longer it’s put off, the worse it will be.
Global Home Prices Are 10% Overvalued
…Global property prices are 10% above the long-term trend and, using price-to-rent, they estimate the overvaluation rises to 11% for the global index. That’s not quite at the pre-Great Recession high in 2006, but getting pretty close. They estimate the price-to-rent ratio reached 13 to 15% back then. However, a different set of economies appear to be at greater risk this time around, such as Canada…
The Canadian Property Bubble Is The Second Biggest In The World
Global housing valuation risks, with economies, ranked according to the average ranks across indicators.
Source: Oxford Economics, Jorda-Schularick-Taylor database, OECD, Haver Analytics.
The Global Housing Bubble Is Creating Two Large Risks
Adam Slater, the firm’s lead economist, warns the risks from the global home price boom are overheating, or a bigger price crash. Overheating would mean home prices push even further from fundamentals. That would make even larger bubbles than we’re currently seeing. Larger bubbles require more economically destructive corrections. “The two are not mutually exclusive,” he warned.
The economist believes a correction is the most likely scenario. “Our long-run assessment of the current boom suggests the risks are tilted to the second kind, i.e. of a big price reversal,” he said.
Stretched valuations make it difficult to see more home price growth, the firm said. “Duration dependence” is also becoming an issue. That’s the technical term for the longer an issue is delayed, the higher the probability it will occur. In other words, a price correction becomes more likely.
Keep in mind various economies are at various stages of their overvaluation. Riskier ones that have seen a bubble persist for longer are more vulnerable to a correction.
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