The whole world might be in a property bubble, but Canada is the second riskiest. That’s the take from Oxford Economics in their latest housing report this morning. Adam Slater, the firm’s lead economist, broke down fundamentals for global markets. He found double-digit overvaluations are widely seen these days. The firm believes a correction is likely to take place, but the longer it’s put off, the worse it will be. Canada is the second riskiest property bubble, only beaten by the Netherlands.
Global Home Prices Are 10% Overvalued
The whole world is overvalued — at least the parts where people eat and sleep. Global property prices are 10% above the long-term trend, says Slater. Using price-to-rent, they estimate the overvaluation rises to 11% for the global index.
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.
Canada didn’t experience much of a real estate price correction during the Great Recession. The legend is this was due to the prudential lending of their banks, and rock-solid valuations. That’s not entirely true.
Markets like Toronto hadn’t recovered from the previous housing correction by then. On an inflation-adjusted basis, it was cheaper to buy in 2006 than it was to buy in 1990. It didn’t crash because it hadn’t recovered yet. Toronto is about a fifth of the country’s economy, so the legend became that Canada is bulletproof. Even though that wasn’t the take of the current central bank governor back then.
The Canadian Property Bubble Is The Second Biggest In The World
The firm ranked markets by their aggregate risk score, and Canada landed the number two spot. It set off alarms in three of the four key areas of overvaluation. Only mortgage credit growth didn’t trigger a warning. Though that might be due to how it’s measured, not the actual trend being healthy.
Housing Risks Vary Across Economies
Global housing valuation risks, with economies, ranked according to the average ranks across indicators.
Source: Oxford Economics, Jorda-Schularick-Taylor database, OECD, Haver Analytics.
Canadian mortgage credit to GDP only increased by 2.1 points from 2017 to 2021. It seems healthy-ish, until you realize global mortgage credit to GDP is under 70% these days. It’s a high level but under the 2008 peak. In contrast, Canada ended 2020 with a ratio of 112%, around 60% higher. The 2.1 point increase might seem small, but you’re talking about a country where mortgage debt is greater than GDP. Not quite the same as comparing more balanced economies, and it has a much different impact.
Global Mortgage Credit Growth
Mortgage credit growth across the 14 advanced economies.
Source: Oxford Economics/Jorda-Schularick-Taylor database/Haver Analytics.
That’s not even touching on the fact Canada’s GDP is heavily reliant on real estate purchasing as well. Mortgage credit growth drives a disproportionate share of total economic growth in Canada. In other words, mortgage credit is driving the economic growth it’s being compared to… and is still growing faster. No other G7 economy is even close to being as dependent on real estate. Canada is running the human centipede of economic models for growth.
The Global Housing Bubble Is Creating Two Large Risks
Slater 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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