Merrill Economist Calls Housing Top

Canadian-Housing-Overvalued Merrill Lynch economist, David Wolf, is bearish on Canada’s housing market according to the Globe. Here’s what concerns him:

  • Mortgage costs rose 9% from June ’07 to ’08
  • 40-year amortizations and 100% financing are disappearing
  • The home prices to rent ratio is now 25% above average
  • The home prices to income ratio is 4:1 (it was 3.2:1 at Canada’s last housing peak in 1989)
  • Commodity prices are collapsing which could impair national income and housing demand

Wolf says his models indicate Canadian home prices are 9.2% overvalued.  “It does look like Canadian houses finally got too expensive, and builders too aggressive, for the underlying demand environment,” he says.

Wolf feels Vancouver and Victoria are 35% overvalued while Regina and Saskatoon are nearly 50% overvalued

  1. I like how he used the term ‘overvalued’ to make the numbers look bigger and more dramatic. Say the value of homes are 100K and things are overvalued by 35% then the homes are going for 135K. If you purchased one and prices returned to what their actual value is you would only see a drop of 26% to get back to the regular price. There is a 33% drop in places that are overvalued by 50%.
    Of course, only people who purchased things well after the price/income ratios went crazy will see any effects anyway. People that purchased what they could afford and are going to live in their homes for a while probably won’t even notice.

  2. If he’s looking for a 9% correction we’re already 1/4 of the way there. I don’t think 9% will be enough though. Our economy seems destined for the Malachi crunch–with US economy cooling on one side and Canadian economy cooling on the other. Till now our domestic economy was making enough jobs to keep housing afloat. Now we’re starting to lose those jobs.

Your email address will not be published. Required fields are marked *

Copy link