Canadian Housing Market Not Overvalued

In a recent IMF Working Paper titled “Canadian Housing Market Overvalued? A Post-Crisis Assessment”, Evridiki Tsounta argues that the Canadian housing market is at equilibrium. Unlike the US and UK, house prices in Canada did not get too overvalued. In th US, prices Florida, Las Vegas, California, etc. soared in the past few years before the credit crunch/recession began. This type of frenzy did not occur in Canada. The stable housing market is one reason why Canadian banks are in much better shape than their US peers.

The abstract from Tsounta’s paper:

“Canadian house prices have increased significantly between 2003 and early 2008, with a marked downward trend since mid-2008, especially in the resource-rich western provinces. This paper estimates the evolution of equilibrium real home prices during this period in key provinces and finds that, following recent declines, home prices are now generally close to equilibrium throughout Canada. However, house prices in Alberta and British Columbia remain around 8 percent overvalued at the end of the sample (second quarter of 2009). Despite the limitations of econometric estimates of house-price dynamics, the measured small degree of overvaluation suggests that the Canadian housing market is essentially at equilibrium.”

Charts – House Price Increases over the years

Home Prices Overvaluation in Canada Provices

Existing Homes Price Change

For more details, go here.

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