# Bank of Canada warns house prices are overvalued by up to 30 per cen



## Siciliano698

OTTAWA — The Bank of Canada estimates that house prices in the country are overvalued by as much as 30% in a report released Wednesday that warned household debt remains the biggest risk to Canada’s economy.
Why the IMF can't stop worrying about Canada's housing market

Canada’s housing market is likely to achieve a soft landing but authorities may need to tighten mortgage rules further to contain vulnerabilities to a crash, the International Monetary Fund said on Wednesday.

Canada avoided the housing market crash that accompanied the financial crisis in the United States. But a post-recession housing boom, fuelled by record-low borrowing costs, has prompted some analysts to warn a bubble may be in the works. Keep reading.

The Bank of Canada released its Financial System Review Wednesday, a bi-annual look at the major risks threatening Canada’s financial system.

For the first time, the bank published its estimates for house price over-evaluation in Canada, putting the reading at between 10% and 30%.

read more ...

http://business.financialpost.com/2014/12/10/bank-of-canada-warns-theres-an-elevated-risk-of-a-home-price-correction/


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## none

I'll believe it when I see it.

I've thought housing was overvalued for about 7 years but belief is a powerful thing. If we all just agree that houses are worth so much then they will be. As long as too many people don't step out of line itsallgood.


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## Just a Guy

It's better known as a Ponzi scheme.


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## sags

There has to be a catalyst I think, before house prices will correct sharply.

A significant downturn in the economy leading to rising unemployment.........rising interest rates.........but, I think it might hold together until the big waves of baby boomers start selling their homes to raise retirement cash.

With decades of equity built up..............they can accept a 30% cut in price and still finance their retirement. They may not like it..........but they can do it if they must.

They will be the competition for those who bought more recently and have much less equity built up........and they will bring the prices down because they want and need to sell.

One of the big catalysts in the US was rising payments due to ARM mortgages, which are very similar to our amortization periods.

Garth Turner had a couple of interesting home price comparisons the other day.

Buffalo, New York and Niagara Falls, New York.........homes range in the $65,000 range. Across the Niagara River in Fort Erie, and Niagara Falls, Ontario.....about $175,000

Americans earn slightly less than Canadians..........but pay lower taxes and their cost of living is cheaper. 

They also have fixed rate 30 year mortgages...........and mortgage interest is tax deductible.

The US is in a recovery and Canada is stuck at zero growth................so I am thinking Canadians prices are definitely in a bubble.


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## HaroldCrump

Poloz can sure talk.
He, and his predecessor Carney, created and inflated the housing bubble with their ZIRP policies, in collusion with the CMHC, OSFI, and the Ministry of Finance.

When you keep interest rates artificially low (ZIRP), financially repress savers & income earners, and provide massive subsidies (CMHC, HBP, secondary insurance guarantees to the banks, etc.) what you get is a household debt and housing bubble, d'uh Poloz.

Having inflated a mother-of-all housing bubbles in Canada, Carney then proceeded to replicate his model in the UK.
He found an equally complicit partner in George Osborne with his Help-to-Buy scheme.
Carney took over the BOE Q/E program from Mervyn King and massively expanded it.

He repressed interest rates in the UK, and along with Osborne, has created an equally inflated housing bubble over there.


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## dogcom

For sure a catalyst is needed or people will keep seeing that you just have to get in the market or keep missing out. A small correction on its own without any catalyst will also be seen as a buying opportunity for those waiting to get in.


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## sags

Along with the housing bubble............the personal debt numbers are downright scary...........

And then there is Obama to add to Canada's oil woes.

The other night on the Colbert show...........he didn't sound like he saw much to gain with the Keystone Pipeline being built.

To paraphrase him.........."This is good for Canada but does nothing for the US. The Canadians want to ship Canadian oil across the US to a port in the Gulf.......so they can ship it to Asia.

The US might get a few temporary construction jobs at the outset but gains nothing long term from the pipeline. It will have to be shown that it doesn't have any affect on climate change."

With all the talk about oil prices and companies.............nobody is even discussing Obama's statement. He didn't appear to be joking when he said it.

The wind has changed direction in Canada..............and it is no longer at our backs. We are facing tough times ahead I think.

Some are predicting oil goes below $60 tomorrow and keeps on declining. It will be an interesting day.


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## HaroldCrump

sags, Obama is bullsh*ing & lying.

*Obama's lies about Keystone XL pipeline exposed.*

You have to remember that he is an extremely condescending, corrupt, and partisan individual.
He is a neo-liberal elite, belonging to the club of champagne socialists like the Clintons, John Kerry, and Tom Daschle.

He is _*not *_Canada's friend, even though our Prime Minister may desperately want to believe so.


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## andrewf

I don't think Harper is under the impression that Obama is a friend or ally. Harper is just pragmatic in how he is trying to advance the interests of the Alberta oil industry.


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## HaroldCrump

It's not going awfully well, is it? :biggrin:


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## martin15

sags said:


> There has to be a catalyst I think, before house prices will correct sharply.
> 
> A significant downturn in the economy leading to rising unemployment.........rising interest rates.........



Oil crashing through $50 a barrel might do it.
It will severely slow down the Oil Sands, and the idea that the Ontario factories will pick up the slack 
is idiotically stupid. Those factories are gone.




HaroldCrump said:


> sags, Obama is bullsh*ing & lying.
> 
> *Obama's lies about Keystone XL pipeline exposed.*
> 
> You have to remember that he is an extremely condescending, corrupt, and partisan individual.
> He is a neo-liberal elite, belonging to the club of champagne socialists like the Clintons, John Kerry, and Tom Daschle.
> 
> He is _*not *_Canada's friend, even though our Prime Minister may desperately want to believe so.


He never was, in spite of all the anti Bush screaming lefties who whining that Obama would be our 'bestest buddy'.

Too late now.


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## Charlie

sags said:


> Garth Turner had a couple of .......


Garth is a good read. But he's a bookseller and pumper of his portfolio management services. He's been writing the same article since 2008. He has a way of plucking stats that support what he wants to say.

Eventually he may be right.....prices ARE nuts. But he's been well wrong so far.


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## Woz

Link to the Bank of Canada Report:

http://www.bankofcanada.ca/wp-content/uploads/2014/12/fsr-december2014.pdf

and the Working Paper it's based on:

http://www.bankofcanada.ca/wp-content/uploads/2014/12/wp2014-54.pdf


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## Chris L

Garth is a one trick pony, that's for sure. He's been calling for a decline and continues to backpeddle if you read carefully. A crash since 2008 but he's not calling for prices to return pre-2008, but you can be assured he'll gladly accept the praise should that happen. Right now he's been saying a 15% decline with occasional hints of more so he always seems right. That said, he has admitted to being totally wrong. So there's that.

Buy if you want, but the headwinds are strong. The BoC admittance is HUGE. They wouldn't actually say it if there was any doubt.


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## HaroldCrump

Let us ask ourselves why someone like Poloz is saying this now.
It wouldn't have anything to do with the events of the last 6 weeks now, would it?

That residential R/E in Canada is overpriced has been apparent for a long time.
Coast to coast, not just a couple of pockets.
The only disagreement has been the scale - 10% or 30% or 50%.

The administration - from the Late Finance Minister Flaherty to Joe Oliver, the CEOs of CMHC, BOC governors Carney & now Poloz, have all repeatedly denied this.
They made reluctant concessions that yes some small parts of the country are overvalued, such as condos in downtown cores of Toronto & Vancouver.
And that too only by 10% or so.
Nothing major, nothing to worry about.

They made half-hearted, ineffectual changes like tweaking CMHC premiums, D/P required for investment properties, etc. to try and placate the ringing alarm bells.

So why now?
Could it be that now they are finally seeing a real, potent, existential threat that can pull the bottom out from under the R/E market?
So they just want to get in front of the storm & issue this warning.
Lest everyone says later that the BOC did not see this coming (again).


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## the-royal-mail

And now, the latest headline is "Bank of Canada says housing-market crash not in the cards"

I don't remember (though I can easily be corrected on this) such obsession with housing in the Thiessen and Dodge eras. Harold?


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## james4beach

HaroldCrump said:


> Poloz can sure talk.
> He, and his predecessor Carney, created and inflated the housing bubble with their ZIRP policies, in collusion with the CMHC, OSFI, and the Ministry of Finance.
> 
> When you keep interest rates artificially low (ZIRP), financially repress savers & income earners, and provide massive subsidies (CMHC, HBP, secondary insurance guarantees to the banks, etc.) what you get is a household debt and housing bubble, d'uh Poloz.


Exactly. These guys are clowns. They pump the system full of money (including CMHC... a huge government stimulus program) and then talk as if inflated housing is undesirable.

Central bankers desire inflation. They want it, they strive to create it. Inflating home prices is one of the primary goals of the Bank of Canada, as homes are a key collateral against everything else in in the financial system.


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## Cal

I found it more interesting that they conclude RE is potentially 30% overvalued, however no changes are proposed to re balance it. I am assuming that they are just waiting it to run out of steam, then will make proposed changes to re-inflate it as needed. ie-if RE market goes down b/c of recession, implement another home reno tax credit to stimulate economy.


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## HaroldCrump

Cal said:


> I found it more interesting that they conclude RE is potentially 30% overvalued, however no changes are proposed to re balance it.


That is because the over-valuation is _*by intent*_.
They wanted to pump housing market, and they have succeeded.

Anyhow, once any housing market gets to these levels, it becomes very hard (if not impossible) to deflate it in a controlled, organized, manageable manner.
Many people get hurt in the process.
Usually it kicks off a sustained period of bear market in housing.


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## andrewf

Personally, I think a large part of the blame should be assigned to the current government. They procyclically loosened credit standards greatly after they came into power, and later tried to dial it back. It was very bad policy and it resulted in a balooning of the CMHC balance sheet. 

BoC is merely responding to the economic environment, and have few/no levers at their disposal to constrain asset prices in particular sectors. BoC is merely fulfilling their mandate to maintain low stable inflation.


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## newfoundlander61

Well my house is fully paid for so any drop is not a concern at all. For me its a place to live not an investment, when I die the kids will get it and just sell it, all is good.


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## fraser

We've been renting in Calgary for 18 months, after 35 years of home ownership in various cities. We could not find anything we wanted to buy and we were simply not willing to enter the bidding wars. Just seems a little silly to me to buy when everyone else is buying. 

We may start looking again next year IF the real estate market gains some stability. Fortunately our investments have done better from an after tax perspective that the rate of increase in house prices. If homes are overvalued in Calgary, we will find out about it over the next 12 months or so.

We like renting so much that we just may remain as renters but move to slightly larger rental accommodation.


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## Jorob199r

fraser said:


> We've been renting in Calgary for 18 months, after 35 years of home ownership in various cities. We could not find anything we wanted to buy and we were simply not willing to enter the bidding wars. Just seems a little silly to me to buy when everyone else is buying.
> 
> We may start looking again next year IF the real estate market gains some stability. Fortunately our investments have done better from an after tax perspective that the rate of increase in house prices. If homes are overvalued in Calgary, we will find out about it over the next 12 months or so.
> 
> We like renting so much that we just may remain as renters but move to slightly larger rental accommodation.


I've been renting in Edmonton for the last 18 months. I think home prices here are over valued too. I hope sustained low oil prices detroy house prices here. I doubt it would happen. A 20% reduction would be nice though. I'm willing to wait for the right opportunity. I'm happy with my investment returns in the interim.


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## fraser

We are leaving Calgary for a few months and will look at the market when we return. We certainly notice more on the market. We reviewed the Calgary Real Estate Boards seller stats for Dec , 2013 and Dec 2014. Significant differences between the YoY numbers. Garth Turner's blog also refers to these stats.

So glad we decided to place the money in equities and rent. We are in no rush to buy and the buy/rent numbers do not compute for our market at the moment.

I think any price decreases will vary by type of property and price range. If oil remains low for 2015 and if the oil price outlook remains uncertain during this period I would expect a 15 percent decrease in home prices...perhaps more in some areas. 

The kicker may be interest rates. IF the US fed increases theirs, and CAD follows suit there will be an immediate impact on those entering the market and those who are highly leveraged with LOC's. If the banks get nervous you can be certain that they will start re-examining LOC's for equity positions.


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## indexxx

Vancouver and surrounds are of course insanely overpriced as is common knowledge. However I don't see that changing so I decided to buy regardless. I felt that the money saved on rent every month would outweigh any potential drop in prices- which, if i happened elsewhere in Canada, it likely wouldn't in Vancouver.


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## nobleea

Jorob199r said:


> I've been renting in Edmonton for the last 18 months. I think home prices here are over valued too. I hope sustained low oil prices detroy house prices here. I doubt it would happen. A 20% reduction would be nice though. I'm willing to wait for the right opportunity. I'm happy with my investment returns in the interim.


The price to income ratio in Edmonton is below the national average, whereas Calgary is above. I could see a 10% reduction across the board in Canada with higher losses in cities where bidding wars occur (CGY, TOR, VAN).


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## NotMe

Jorob199r said:


> I've been renting in Edmonton for the last 18 months. I think home prices here are over valued too. I hope sustained low oil prices detroy house prices here. I doubt it would happen. A 20% reduction would be nice though. I'm willing to wait for the right opportunity. I'm happy with my investment returns in the interim.


Just a side note, why would you hope for oil prices to destroy home prices? I don't think an epic wave of foreclosures is a good thing for Canada either, but maybe that's just me.


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## Jorob199r

NotMe said:


> Just a side note, why would you hope for oil prices to destroy home prices? I don't think an epic wave of foreclosures is a good thing for Canada either, but maybe that's just me.


I'd like to buy a house that isn't over valued (in my opinion) I'd also love to see interest rates go up to 1980s levels, to reward savers like me, rather than spenders, but I realize I'm quickly becoming the minority with that thought process.


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## Siciliano698

Jorob199r said:


> I'd like to buy a house that isn't over valued (in my opinion) I'd also love to see interest rates go up to 1980s levels, to reward savers like me, rather than spenders, but I realize I'm quickly becoming the minority with that thought process.


Well Said Jorob199r.

Gold Owners are also in the same level as a Fiat Currency Saver as per the Reserve Fiat Currency of the World policy USD $ (Look to the recent Gold Devalution from 2011-2012 $1900 to $1200 USD 2014 on avg).

It seems the Market is made for a rising Housing Speculation in Fiat currency along with the Stock Market at the present moment & a higher level of Taxes @ the Federal/Provincial/Municipal.

I encourage all Canadians to take the 2015 Election Seriously many conflicting issues are comming to a clash next year.

We are in for an interesting ride in 2015.


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## NotMe

Jorob199r said:


> I'd like to buy a house that isn't over valued (in my opinion) I'd also love to see interest rates go up to 1980s levels, to reward savers like me, rather than spenders, but I realize I'm quickly becoming the minority with that thought process.


You know not all home owners (such as myself) are major spenders. My wife and I drive the same now 13 year old car we did when we bought our house in 2007, have significant half-mill in investment accounts and live comfortably but hardly winter in milan. Not every homeowner in Toronto is overextended and in credit card debt, just saying. I think there'd be lots of bad things that would happen if interest rates went way up too. If you're saying that you'd like prices to go down because you don't want to pay market rate for them, well I don't blame you but I'd say the same thing about university tuition, daycare, and food for that matter.


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## marina628

The successful formula for home ownership is to buy what you can afford and not worry about future value.We scraped and saved to buy our first home 23 years ago and needed a basement income to be comfortable then ,since that time we bought and sold 3 homes for our principle residence and not once thought of future value.The people getting caught are the ones who buy with intention to stay less than 5 years then lose on transaction cost and have very little paid down on the mortgage.


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## fraser

Part of the challenge is the media.

Picked up our Calgary Herald yesterday and saw a huge headline in the homes section..."Calgary Market Booms". This just is not the case. We have been looking at real estate in Calgary lately and we have reviewed the latest CREB stats. Real estate in Calgary stopped booming two months ago or more. Yet 'feel good' newspapers like the Herald continue to publish this nonsense. My guess is that stories like these are driven more by potential advertising revenue than they are by facts. 

Not surprised though, after living in 5 large cities in Canada, twice in Calgary, the Calgary Herald would easily make the bottom of our list in terms of newspaper quality. That is why we have primarily replaced it with on line Globe & Mail.


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## HaroldCrump

Within 3 months of the oil crash, _*Calgary home sales down 7.5% & listings are up 42% *_


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## HaroldCrump

andrewf said:


> Personally, I think a large part of the blame should be assigned to the current government. They procyclically loosened credit standards greatly after they came into power, and later tried to dial it back. It was very bad policy and it resulted in a balooning of the CMHC balance sheet.


Agreed that housing bubble is just as much a matter of fiscal policy as monetary policy (and politics).
However, this process was started long before the current administration took office in 2006, and it was a minority govt. between 2006 - 2012.

Canadian federal governments, past and present, have been pumping housing for decades.
The whole CMHC thing is nothing other than a housing pump.
So are programs like HBP, First Time Homebuyers Credit, Home Renovation Tax Credit, etc.

CMHC is a bunch of politically appointed fatcat bureaucrats with no tangible work, responsibilities, or accountability.



> BoC is merely responding to the economic environment, and have few/no levers at their disposal to constrain asset prices in particular sectors. BoC is merely fulfilling their mandate to maintain low stable inflation.


They're not doing a great job of it, given the housing market.
That is not evidence of "low stable inflation".


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## andrewf

Asset prices are not directly included in CPI. Good thing, too, as it would make it too noisy to be of any use in setting policy otherwsie.


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## NotMe

HaroldCrump said:


> Within 3 months of the oil crash, _*Calgary home sales down 7.5% & listings are up 42% *_


Not saying that's not true, but what's the typical decline in December and January and February anyway?

I think too many people in general take a short period of time, and project that trend out. I mean Garth Turner had some stupid post the other day about how the first 5 days of January were the worst on record. I mean, 5 days. In January.

I had a finance professor who said that two quarters isn't a trend, hell 2 years isn't a trend. He had a great slide mapping out the happiness trend for a Turkey from about June to September where the happiness of the turkey just went up and up, projected to infinity. The next slide said: Then thanksgiving happened.


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## HaroldCrump

andrewf said:


> Asset prices are not directly included in CPI. Good thing, too, as it would make it too noisy to be of any use in setting policy otherwsie.


That makes it easy for governments to engineer asset bubbles, particularly housing.
Eventually, the full price of the house + interest has to be paid on or before final settlement (i.e. estate dissolution).


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## andrewf

Carrying costs are factored into CPI, so house prices do influence it indirectly.


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## HaroldCrump

There is an inverse relationship (ceteris paribus) between financing costs and asset price.
Mortgage rates have been falling since 2008, and house prices skyrocketing (although the increase had already started around 2004/5).
Carrying costs are also artificially lowered by high amortizations allowed until recently (0% down 35 & 40 yr. mortgages).

IMO, current formula does not capture the true inflation in housing.
Many folks that bought between 2007 & now will not be able to pay off their mortgages until well into their 60s, by which time they would have paid 3X times original cost of the property in interest.

Housing should be treated like any other durable consumer good like car, appliances, or furniture.
Nominal increases in avg prices per category (SFH, condo, etc.) should be reflected directly in CPI.


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## andrewf

How do you propose to do that in a way that doesn't make CPI useless as a policy indicator? One option is to stop relying on inflation targeting and moving toward nominal GDP level path targeting for monetary policy, but I suspect that just replaces the problems with CPI with another set of problems around using nominal GDP. GDP figures are often significantly restated after some time has passed, and GDP measurement methodology is probably more susceptible to political meddling than CPI.


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