Our Commentary on House Prices

21 January 2015

Today I want to talk about the bank of Canada and their irresponsible comments that house prices are 10% to 30% over valued in Canada. As an economist by training, I did read the whole 57 page report on how they arrived at these numbers.

Economists make errors, not from the analysis they do, but because of faulty assumptions and faulty data. In this instance the Bank of Canada compared a House Price Index to Per Capita Deposable Income on an annual basis. The result is a number for Canada. And because the data was limited, the Bank of Canada decided to add 18 other OECD Countries into the mix as well.

The first error is that real estate is NOT National, but a local market. The last time I checked, houses can’t be transferred from a market of oversupply to one of under supply.

Secondly, disposable per Capita Income comes from Stats Canada. Lots of people don’t report their income. So what about unreported income? Why do we give out mortgages on stated incomes as opposed to income reported to Revenue Canada? What about the impact of immigrants, who come to Canada with lots of money and no jobs? What about foreign buyers? Toronto is not Moose Jaw. The Bank of Canada did provide a range of 10% to 30% of over valuation because their results, even with faulty data, are not accurate. Folks, Let the real estate market do the talking. If prices are overvalued they will drop over time. If prices are undervalued they will rise over time. I don’t pretend to be an expert on all real estate markets in Canada, unlike the Bank of Canada, Just the Toronto market. And I can tell you that prices are not overvalued here.