Saturday, 26 January 2013

Canadian House Prices - January 2013

There is always lots of interest in determining if housing prices in Canada are too high. There is even some talk that the Canadian housing market is in a bubble (Macleans). The Economist has a really nice interactive tool that allows users to compare housing markets in different countries around the world. One way to compare housing prices across time is to follow the ratio of house prices to income. According to the chart, this value for Canada was 100 in 1985 and then rose quickly to 155 in 1989 (a 55% increase in just 4 years!). After 1989, the ratio of house prices in Canada to income slowly dropped throughout the 1990s. In 2001 the ratio of house prices to income in Canada started to increase and now stands at a record high of 180. Notice that for any particular year, the ratio of house prices to income in Canada is larger than the corresponding value in Britain or the US. Of the countries shown in the chart, the Canadian house price to income ratio is most similar to Australia (although this ratio for Australia has been weakening in the past few years).
So what is the upshot for Canada? High ratios of house prices to income are not good for Canadians because many home buyers need to borrow money to buy a house. Borrowing money means taking on debt. Taking on debt today is easy because of the low interest rates, but once interest rates start to rise, mortgage payments for many are going to be a big problem. For foreign buyers with lots of money, rising interest rates are probably not much of a concern.

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