Tuesday , 24 May 2022

There’s NO Comparison Between the U.S. Housing Bubble of 2006 and Canada’s Today

The house price-to-rent ratio shows Canadian real estate is drastically overvalued making the U.S. real estate bubble back in 2006 look like a sleepy backwater market of value investors.

House Price-To-Rent Ratio

The house price-to-rent ratio is an indicator used to gauge overvaluation. It compares the cost of a home to the cost of renting a similar place. Since rent is a fundamental indicator tied close to income growth, it tends to be mostly stable over time. That is, it reflects a change in earnings or productivity. As opposed to home prices, which mostly reflect access to credit.

  • When home prices grow faster than rents, it means valuations are becoming stretched. Persistent growth means prices are becoming overvalued. U.S. economists feel this was one of the most obvious signs of the housing bubble in 2006, in hindsight.
  • When the ratio falls, it means home prices are becoming more fairly valued. If it persistently falls, it can mean home prices are becoming undervalued. In a healthy market, the price-to-rent ratio would move relatively horizontal.

Today we’ll be looking at the indexed values, which help to allow multi-country comparison. When looking at the indexed value, you’re looking for the change over time, instead of the actual number. What you don’t want to see is persistent and high growth. That would mean the market is becoming overvalued.

  • Canadian home prices have grown 107% faster than rental prices since 2005, indicating significant overvaluation…and 7.7% in Q4 2020, compared to the same quarter a year before…
  • The U.S. has had an even bigger year for home prices growing 8.1% faster than rents when compared to the same quarter a year before so it’s had some decent growth over that period.
  • [That being said,] the long-term trend looks totally different from Canada over the past few decades. The index is actually down 1.5% from 2005…with the Canadian home prices growing 105.7 points faster than the U.S….

Home prices in Canada are now far in excess of what rental prices can support…but you would be hard-pressed to find a Canadian that thinks home prices can fall anytime in the near future.

Editor’s Note:  The original article has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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