The Unassuming Economist

“Household leverage remains high, and while house price and construction growth have come off their post-crisis peaks, high valuations and excess supply in a number of housing markets are a source of vulnerability. If maintained, the ongoing moderation in the housing market suggests little need for additional macro-prudential measures but it is important to remain vigilant. Over the longer term, rethinking the role of government-backed mortgage insurance may reduce the government exposure to housing sector risks and lead to a more efficient allocation of resources,” says the new IMF report on Canada.

More specifically on house prices and valuation measures, it says “Canada’s housing market has cooled but house prices remain overvalued, although with important regional differences. Despite picking up somewhat in mid-2013, in line with renewed strength in resale activity, Canada’s house price inflation and residential investment growth have slowed. On average across Canada, house prices grew about 4 percent (y/y) in November 2013, up from 2 percent in April but about half the pace two years ago. The slowdown involved all large metropolitan areas except Calgary, particularly Vancouver (where house prices in the first eleven months of 2013 were about 3 percent lower than a year ago). Housing starts have also picked up since April 2013, but are on a declining trend: as of November 2013, their 6-month moving average was about 10 percent below last year’s peak, mainly owing to weaker construction of multiple units, especially in Ontario. Despite the downward trend in growth, a few simple indicators continue to suggest overvaluation in the Canadian housing market. In particular, house prices are high relative to both income and rents, compared to historical averages and many other advanced economies. Staff estimates that, in real terms, average house prices in Canada are about 10 percent above what would be justified by fundamentals, with most of the gap coming from the real estate markets in Ontario and Québec.”