Thursday, April 10, 2008

IMF says Canadian Real Estate Market is Undervalued

Hi All,

I have noticed as of late that some buyers have been spooked by whats happening in the US. Fortunately the sub prime crisis will not happen here in Canada.

Have a look at the at this article sourced from the International Herald Tribune originally from the IMF.

It basically says that a lot of housing markets around the world are overvalued, but that Canada's is UNDERVALUED! Read on folks!

As a weakening housing market appears to be dragging the U.S. economy into recession, the International Monetary Fund warned this week that home prices in other industrial countries were even more overvalued.

In its World Economic Outlook report, the IMF also concluded that central banks should pay close attention to home prices and consider raising interest rates when prices are rising rapidly. That conclusion is directly contrary to the established policy of most central banks, including the U.S. Federal Reserve Board, which ignores home prices when they are expanding.

In the current credit crisis, which began with problems in the subprime mortgage market, the Fed has moved aggressively to lower interest rates.

"A central bank that wants to stabilize the economy is better served by responding to house prices, both when they go up and when they go down," said Roberto Cardarelli, a senior economist with the IMF. He said that was particularly important in countries with relatively open mortgage markets, like the United States, which make it easy for homeowners to get access to cash when prices are rising.

The fund looked at trends in housing prices and mortgage debt in 17 countries, and attempted to assess how much of the price changes could be attributed to economic fundamentals, including trends in personal income, demographics and interest rates. It concluded that in mid-2007, house prices in the United States were 11 percent higher than fundamentals would justify.

That overvaluation was barely a third as high as in Ireland, where the IMF estimates that house prices were 32 percent higher than fundamentals would support. The Netherlands, Britain, Australia, France and Norway all showed overvaluations of at least 20 percent.

On the other end of the spectrum, the IMF concluded that homes were undervalued in Canada and Austria.

Cardarelli pointed out that, adjusted for overall inflation, home prices rose at a slower rate in the United States in this decade than they did in many other countries, with the mid-2007 figure up 42 percent from the first quarter of 2000. Comparable figures included gains of 95 percent in Spain, 90 percent in Britain and 85 percent in France.

Mortgage debt has shot up over recent decades in many countries, but there remain sharp variations as some markets make it much harder to borrow or restrict the loan-to-value ratio of mortgage loans.

In the United States, total mortgage debt more than doubled, as a percentage of gross domestic product, going from 34 percent in 1983 to 45 percent in 1990 and then to 76 percent in 2006. But the increases were much greater in some countries. In the Netherlands, the mortgage indebtedness hit 98 percent of GDP, and in Denmark it rose to 101 percent.

Perhaps not coincidentally, when the IMF put together an index of mortgage markets, the most liberal in terms of lending standards was the United States, followed by Denmark and the Netherlands.


Anonymous said...

Canada not equal to Vancouver.

Vancouver is overvalued by fundamental measures such as " personal income, demographics and interest rates"

Mike Stewart a Downtown Vancouver Realtor with Century 21 In Town Realty said...

Hi Anonymous,

Thanks for your comments.

The Vancouver real estate market is in a period of change right now.

You are seeing more sellers, but about the same or less buyers compared to this time last year.

I would disagree that Vancouver is over valued based on the criteria you mentioned.

1) Personal Income - The 65% of the buyers I am working with are low ratio - ie they are putting more than 20% down. My deals don't fall apart because the buyer can't afford it.

2) Demograpics - Canada is a slow population growth country, but Vancouver is a population magnet within Canada and has been growing quickly for a very long time.

3) Interest Rates - Interest rates are at historic lows. Even if we see some increases in rates we are far from the early 80's with interest rates over 20%

I'd love to hear more of your thoughts and comments!

Thanks again Anonymous!