Relax, Canada’s housing market NOT overvalued

This story has been updated.As far as mortgage expert Calum Ross is concerned, Bank of Canada Governor Stephen Poloz doesn’t know what he’s talking about.At least when it comes to Canada’s housing market.In releasing the Bank’s semi-annual Financial System Review in mid December, Poloz warned that house prices could be overvalued by as much as 30 per cent. This, plus consumer debt loads, are the two biggest risks to Canada’s economy.When someone the stature of the BoC governor issues such a warning, people tend to get a little nervous.In this case, those people are homeowners and prospective homebuyers.Cause for alarm?But, is there reason for them to be nervous?“The BoC has been warning about household debt for some time, so this is not new news,” Ross, president and principal broker at Calum Ross Mortgage, Toronto, told New Home & Condo Guide.“But the commentary on housing values is surprising, especially given the scope of the Bank of Canada’s mandate.“Respectfully, the Bank of Canada is no more qualified to talk about the specifics of the housing markets than the Canadian Real Estate Association is qualified to comment on monetary policy.”While aggregate debt is something of a concern, Ross says, it is total payments after tax, compared to after-tax cash flow – and not total debt levels – that get households into financial trouble.“Factually, household net worth has never been higher in Canada, and this means households could essentially liquidate assets and wipe out the debt.“Saying there is a Canadian housing market is not that dissimilar from saying there is a Canadian temperature – the term itself is irrelevant. The person who lives in a house that went down in value because of local labour markets does not care about Toronto, Calgary or Vancouver’s theoretical overvaluation. Unless I missed something, supply and demand set price, and it is a long established fact that low interest rate environments make real asset prices go up. Not surprising that price levels on a whole are trending up. The relevant figure is value compared to inflation and real wage growth.”At its recent series of Housing Outlook Conferences across the country, Canada Mortgage and Housing Corp. said it didn’t see overheating as a serious concern.“We don’t see overheating as being a problem in any of the markets across Canada,” Bob Dugan, chief economist for CMHC, told New Home & Condo Guide. “Some markets are stronger than others, particularly in western Canada.”Count Royal LePage President and CEO Phil Soper among those who feel BoC's Poloz exaggerated the prospect of overvaluation in Canadian real estate."There is a significant difference between a ‘valuation’ and the price a home will actually sell for," Soper told New Home & Condo Guide.The Royal LePage House Price Survey (HPS), which has tracked and reported on home values from coast to coast for 40 years, shows that a standard two-storey home in Vancouver’s west end will sell for approximately nine times that of a similar home on the opposite coast in Moncton. "Teachers and engineers do not earn nine times as much in BC as in New Brunswick, but market demand yields this wide home price differential."And, like Ross, Soper stresses that real estate prices are very local in nature. "While still more expensive than Moncton real estate, a similar two-storey home can be purchased in the Greater Vancouver Area’s southern suburbs for one-quarter the cost of a west end property."The Bank of Canada needs to raise red flags when more homebuyers engage in risky behaviour," says Soper. "The vast majority of Canadian homeowners, however, have safe, traditional mortgage financing in place."As for Canadians’ average household debt, Dugan described this issue, too, as overblown, since real estate accounts for a majority of the assets held by Canadians.Outlook for 2015Ross, who says he handles more mortgages for real estate investors than any other broker in Canada, and is an investor himself, expects prices and sales will continue to grow in 2015 – in places where the economic fundamentals support the growth.“There are two times that real estate values matter – when you buy and when you sell. What happens in between is no more relevant than the total cash you have in the middle of a game of Monopoly. If you buy and hold, real estate as an asset class has proven to be a better hedge against inflation than any other asset class.”Related readingHousing outlook for Toronto and Canada overall: full steam aheadInterest rate hike unlikely in 2015: BMOCanada's hottest real estate market? You might be surprised