IMF: Canada Has The Most Overvalued Homes In The G7, Fourth Globally

IMF - Canada Has The Most Overvalued Homes In The G7, Fourth Globally

Global home prices are on the rise, and Canada is leading the pack. Numbers from the International Monetary Fund (IMF), the monetary policy arm of the UN, show that Canada ranks amongst the top ten of all of their housing indicators. While that sounds like a good thing, the IMF generally warns that too much growth means overvaluation. Overvaluation requires a correction, and if it goes too high, even a crash.

Global Real Home Price Index

The global real home price index continued to rise, almost hitting it’s all-time high. Inflation adjusted home prices across the globe ended the fourth quarter of 2016 at 155.72. This represents a 1.77% increase from the same time one year before. The index is now just 2.13% below the all-time high established in the first quarter of 2008. While that can be read as frothy global home prices, the climb was much slower this time around. This could mean more sustainable global growth than we saw leading up to 2008.

Source: BIS, ECB, Federal Reserve Bank of Dallas, National Sources.

Global Real Home Prices

Most countries tracked by the IMF saw real home prices growth. This measure looks at how prices changed over the past 5 years. The top 5 countries for real price growth were Iceland (12.51%), New Zealand (12.23%), Hungary (10.65%), Latvia (10.51%), and Canada (10.49%). The median growth for all countries was 2.86% . The top five countries grew at least 3 times that rate.

Source: OECD.

House Price-to-Income Ratio

Home prices grew faster than income in 15 of the 32 countries tracked by the IMF. This is a basic affordability measure for housing, and takes the median house price and compares it to the median disposable income over the life of a typical mortgage. The highest numbers were observed in New Zealand (137.02%), Austria (126.43%), and Germany (124.58%). Canada came in seventh with 118.75%. The higher the ratio, the less likely the country is able to maintain home prices without a severe correction.

Source: OECD.

House Price-to-Rent Ratio

This is the primary measure the IMF uses to determine if a market is “overvalued.” They use the ratio of home prices to the cost of renting, then measure the deviation from the normal. On the global index, Turkey (149.70%), New Zealand (139.75%), and Israel (132.94%) take the top spots. Canada is in fourth globally, and is the highest of any G7 country at 132.94%. Generally speaking, it’s a smarter idea to rent in these countries if all you can afford is the median house price (or less).

Source: OECD.

Home price growth is generally a good thing, but too much of a good thing usually has consequences. The further away these prices get from healthy, sustainable growth, the worse it will be for the market. Best case scenario, years of stagnation while wages catch up with prices – not unlike what happened in the US. Worst case scenario…well, let’s not use the C-word. Uh…not that one, the housing c-word.

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