Canada's Housing Bubble

Sep 30, 2010 Michael Babad Globe and Mail

Where home prices are most inflated

Canadian homes are overvalued by almost 12 per cent, driven largely by inflated prices in British Columbia, Alberta and, to a lesser extent, Ontario, CIBC World Markets says in a new report today, warning the housing sector "looks vulnerable" in the West.

"Granted, no part of Canada looks to be immune to further housing market weakness, with significant momentum having been more recently lost," said economist Warren Lovely. "... But it's in B.C. and Alberta where housing prices have overshot fair market value by the largest margin ... with an ongoing correction expected to dull residential construction activity and blunt consumer enthusiam."

In B.C., CIBC said, house prices stand almost 17 per cent above fair value, and in Alberta 12.5 per cent and Ontario 11.6 per cent.

House prices v. fair value

The real estate market has cooled considerably since its dramatic rebound from the depths of the recession, and is expected to cool further. Given the power of the sector in the overall recovery, that's troublesome.

Yesterday, National Bank said house prices in July were 6.4 per cent above their pre-recession peak, and most economists see costs slipping well into next year.

And today in Windsor, Ont., Bank of Canada Governor Mark Carney also noted that the sector is "declining markedly" from high levels.

"The slowing since the spring in resale, renovation, and new home construction activity has been driven by a number of factors, including the passing of pent-up and pulled-forward demand; the expiration of the federal Home Renovation Tax Credit in January; the tightening of standards for government-backed insured mortgages that came into effect in April; the introduction of the HST in Ontario and British Columbia in July; declining affordability; and subdued income growth," Mr. Carney said. "... Overall it appears unlikely that private consumption will be bolstered by substantial house price gains going forward."

Play Video: Canadian consumer confidence sags