GTA Home Prices are not Over Priced!
According to The Economist, average house prices in Canada are over‐valued by some 22%.*Our calculation for the GTA using the same measure as The Economist – ratio of changes in Statistics Canada’s New Housing Price Index to changes in the rent component of the Consumer Price Index – points to a larger over‐valuation for the GTA. The premise behind this measure is if housing prices rise excessively in relation to rents, demand will shift from ownership to rental leading to a decline in house prices and a rise in rents. There is some truth to this but I opine the proper comparison should be between the ongoing costs of home ownership (mortgage payments being the main cost) and rents, not prices and rents. Moreover, the comparison should be between ongoing costs associated with an average‐priced MLS home and average market rents as reported by CMHC since the price/rent data series utilized by The Economist historically understate price and rent increases.
Adopting these changes still shows that ownership costs have gone up more than rents, but not as much as indicated by the measure used by The Economist.
While this is all nice, I do question the way The Economist approaches whether a housing marketis overpriced or not. In my opinion, the proper measure is the relationship of monthly costs associated with home ownership to incomes. This is the measure used by RBC in its affordability report. On this basis, homes are not overpriced in the GTA at this time but will start to be as home prices continue to rise and mortgage interest rates commence an upward march.
*“Global House Prices: Rooms with a View”, The Economist,
July 7, 2011.
Frank A. Clayton, PhD
Economic Advisor, BILD
