Canada's Condominium Magazine
Just a few days ago, the Organization for Economic Cooperation and Development (OECD) said that it was worried about the overvaluation of Canada’s residential housing market. The organization rated Canada’s real estate the third most overvalued in the world, based on home prices and incomes. Today, the secretary general of the OECD seemed to go out of his way to make clear that he does not consider the housing market in Canada to be in bubble territory, or even in any real trouble. In an interview with the Wall Street Journal, Angel Gurria provided some clarification on the OECD’s statement. Overvalued is not the same as a bubble, Gurria said. What has happened is that the market has been building steadily, “based on growth, jobs, good income, and a Canadian economy that’s been in good shape.”
Now, the original OECD statement did not say anything about a bubble, and if the situation Gurria describes—a housing market driven by “growth, jobs, good income”—does not sound like a bubble to you, you are in agreement with Gurria. “Frankly, it’s not a bubble,” he told the WSJ, but he does think there will be “a cull” in some investment in the sector, and prices will “stabilize” over time. Note that the rate of growth in Canadian housing market prices was well below the average on the latest Knight Frank Global House Price Index: 2.6 per cent in Canada vs 6.6 per cent global average, year over year.
Asked if the “slowdown” in housing would have a significant impact on the economy in Canada, Gurria repeated the familiar (to Canadians, anyway) litany of reasons why we have done so well compared to most other economies in the last few years: better regulated and capitalized banking system, prudent fiscal policy, diversified economy, abundant natural resource wealth, access to the giant US market and a free trade agreement with the largest economy in the world.
Obviously very familiar with Canada’s economy—he is Mexican, and was involved in negotiating the North American Free Trade Agreement, among his other international accomplishments—Gurria refers to the fiscal policies of Jean Chretien and Paul Martin as foundational to the present government’s policies, saying that the country is “reaping the rewards” of those past virtues and present good policies. “It would be good if there were many more countries like that,” he said.
Canada, Gurria goes on, is really one of the most favoured nations, thanks to that free trade agreement with the US and all those natural resources. That position is good for business and consumer confidence, he says, and that confidence leads to spending and investing and optimism. “I think this has been good for Canada and, unfortunately, isn’t the rule for the rest of the world.”
How Canada compares with the rest of the world
Things must really be bad when a single-digit decline in housing value is taken as a positive sign. That is the case in Ireland this year, where property values dropped just 3 per cent in the first quarter. Compared to the last several quarters, when declines were in the double digits, this is taken as good news, at least by the authors of the Knight Frank Global House Price Index.
The Knight Frank Index, a tool used mainly by real estate investors, tracks fifty-five housing markets around the world. In the first quarter of 2013, thirty-five of those markets were in positive territory. The index is now 14.7 per cent above the low of Q1 2009, the depths of the world recession. The average rate of price increase was 6.6 per cent.
At the extremes of the scale were Hong Kong, which had the largest rise on an annual basis, at 28 per cent, and Greece, where property prices fell a further 11.8 per cent. In China, year-over-year prices rose 23.8 per cent, but for the first quarter, the rise was a stunning 10.7 per cent. This despite the fact that the Chinese government has been trying to cool the market. If prices continued to rise at those rates, they would easily surpass the spectacular growth that was seen in many big US cities in the lead-up to the housing market crash of 2006.
Europe was the overall underperformer in the global pack: all of the countries, except Japan and South Korea, that recorded negative growth in the quarter were in Europe.
Canada, which recently was told by the Organization for Economic Cooperation and Development (OECD) that its property is overvalued, took 28th spot on the Knight Frank ranking, with a year-over-year change of 2.6 per cent, comparing Q1 2013 and Q1 2012.
US markets rising solidly again
To understand what a bubble really looks like, consider the situation in the US in the ten years leading up to the crash of 2006. Housing prices rose in Phoenix by 185.5 per cent, in Los Angeles by 268.1 per cent; in San Diego by 250.1 per cent; in New York City by 173.1 per cent. The composite rise for the top ten US cities for the period was 194.3 per cent.
In 2006, those same cities saw housing prices drop 55.5 per cent, 40.6 per cent, 39.9 per cent, and 24.8 per cent respectively. The composite fell 34 per cent.
Housing prices in the US have risen for the last twelve months consecutively, according to Knight Frank.