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Wednesday, September 15, 2010

Canadian housing overpriced says OECD

According to the Organization for Economic Co-operation and Development (OECD) Canadian housing looks “overpriced” and they believe the Canadian government should take measures to deliberately slow the mortgage market. The Paris based think tank monitors the economics of 33 wealthy member nations, including Canada.

“Canadian house prices, or at least some regional or local housing markets, notably those of Toronto and Vancouver may still reflect excess demand conditions,” says the OECD's annual review of the Canadian economy. “Housing looks overpriced on the basis of both price-to-rent and price-to-income measures.”

The average Canadian in 2010 makes LESS than what they made in 2007 and our disposable income is dwindling. Meanwhile household debt in Canada has skyrocketed 250% from 1989 levels to $42,000 in debt (from $16,800 in 1989). Simultaneously housing prices in Canada have continued to soar, so that the average price of a home in Canada is now approx. $330,000, but the average Canadian only makes $38,000 / year.

Affordable homes, according to economists should be in the range of 3 to 5 times the cost of annual income, after taxes. In Canada its 9 times that of income which means Canadian homes are overpriced.

According to the OECD the cost of Canadian homes is now 35% higher than long term averages.

The OECD also predicts about 7.5% of Canadians are so in debt they could find themselves financially vulnerable by 2012 if interest rates rise while borrowing stays at the current pace. “High household indebtedness also implies a growing vulnerability to any future adverse shocks,” says the OECD. “Household credit growth needs to slow down.”

The Canadian government currently provides financial guarantees for default insurance on risky mortgages, but this is basically just endorsing/ensuring risky mortgages instead of trying to slow them down. The OECD has noticed this.

“Rules to qualify for government backed insurance have been tightened, but more measures should be taken if needed to cool down the market.”

The OECD report suggests the government should require larger down payments on all federally insured mortgages. They also suggest the government force banks to disclose how “sensitive” their mortgage revenues are to rate hikes so that homebuyers aren't getting caught in the middle later on.

“Lending standards and the framework for mortgage insurance are the right tools to contain this cycle,” says the OECD.

The OECD notes that subprime mortgages make up 5% of mortgages in Canada. In 2007 before the recession hit the % of subprime mortgages in the USA was 33%.

As such when home prices in Canada drop or collapse, it should be in the range of 15 to 18% instead of the 45% range it was in the USA. The drop was the biggest in large cities like L.A., Miami and New York. Canada should expect the largest drops in Vancouver, Toronto and Montreal.

Furthermore the big drops were usually in the suburbs or parts of the cities which were more financially woeful. Housing prices stay relatively stable in older / more wealthy communities.

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