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CMHC's Richard Cho says everything from employment levels to household income and migration to spending levels signal to tough times ahead for the local housing market. CREB®Now file photo.
CMHC's Richard Cho says everything from employment levels to household income and migration to spending levels signal to tough times ahead for the local housing market. CREB®Now file photo.

Aug. 01, 2015 | Joel Schlesinger

Bursting the bubble on overvaluation

Several reports have sounded the alarm our real estate market is grossly overvalued, but industry watchers contend Calgary isn't poised for the big crash some are forecasting

Reports suggesting Calgary's housing market is over-valued, supported by recent price corrections, are missing many of the obvious indicators saying otherwise, say experts.

The metrics used to measure affordability simply do not back up the argument that Calgary's real estate market is highly overvalued and ready for a precipitous drop in home values, said Robert Kavcic, a senior economist with Economic Research BMO Capital Markets in Toronto.

"One of the (metrics) we look at is the average mortgage payment as a share of income, and right now that's a little bit above the long-run norm of 27 per cent at about 29 per cent," he said.

That's significantly less than 2007, when the ratio was 36 per cent just before a significant drop in prices following the 2008/09 stock market crash.

"Just for some context, when you go back to the late '80s when we had a real housing bubble in southwestern Ontario and had a resulting correction, we got up to about 45 per cent on that measure," said Kavcic.

CREB®'s mid-year forecast update, released earlier this week, also challenged the over-valued evaluation.

"While several entities have identified some level of overvaluation in Calgary's market, these assessments do not point toward a price correction," it stated. "More often, a price correction is associated with an economic shock that propels the market in a different direction."

Earlier this year, The Economist's feature on Canada's housing market, titled When the Bubble Bursts: Surviving the Canadian Real Estate Crash, argued the market could be as much as 35 per cent overvalued.

Another recent study by Deutsche Bank AG estimated real estate was about 75 per cent overvalued when both median house prices were compared with median household incomes and rental prices.

Richard Cho, principal of market analyis for Canada Mortgage and Housing Corp. (CMHC) forecasts price declines in the city for 2015 as migration is expected to fall from more than 30,000 in 2014 to about 20,000.

Yet he doesn't anticipate drops as drastic as those experienced during the 2009 global economic downturn.

"Prices are forecast to come down about 2.7 per cent on average," he said. "That's not all that bad compared to what we saw in 2009 when there was almost a five per cent decline in prices."

Kavcic, meanwhile, says most economists are predicting prices will remain relatively flat for the next two years.

He adds doomsayers who are speculating that a massive real estate bubble is now poised to burst in similar fashion to what happened in the U.S. following its subprime market meltdown are comparing apples to oranges.

"Foreign investors looking at Canada tend to make this assumption, which I actually believe is very wrong because the valuations are not nearly as stretched as they were in the U.S," he said.

Tagged: Calgary Real Estate News | Canada Mortgage and Housing Corporation | Housing Market | mid year forecast | Residential | Richard Cho | Robert Kavcic | Statistics

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CREB® acknowledges that its office is located, and that its REALTOR® members serve, on the traditional territories of the peoples of the Treaty 7 region and Métis Nation of Alberta, Region 3. We honour and acknowledge the members of the Métis community and specifically, the Métis Nation Region 3. In the spirit of reconciliation and because we are all treaty people, we also acknowledge all Calgarians who make our homes in the traditional Treaty 7 territory of Southern Alberta.

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