What housing bears may be overlooking

Sure, there is over-valuation in housing but there are other factors to consider too.

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(Illo: Alberto Ruggieri/Getty)

It was nearly a year ago when Professor George Athanassakos wrote a Globe and Mail article warning that housing was a bubble about to pop, and he has just penned another piece with the same message. I agree with him that there is over-valuation—but I also believe there are other factors to consider.

Of note is the monetary cycle. The U.S. housing market didn’t implode when the Federal Reserve was trying to generate economic growth. Nor did it implode when interest rates started edging up (because income and job growth were picking up and supporting the housing market). It only keeled over when the Fed was deliberately trying to slow down the economy and had jacked up its rates until they surpassed long-term rates (inversion in the yield curve).

That was the catalyst for an end to the U.S. housing mania—a major tightening in monetary policy. I don’t see it in Canada yet; in fact, it seems to me that the Bank of Canada is still at the stage (as is the Fed) where it wants to generate growth instead of slow it down.

Another consideration is the choice of valuation yardsticks. How about looking at the measure most ordinary folk go by, which is affordability—i.e. monthly mortgage payments in relation to their income. The over-valuation doesn’t look so severe on this basis because a big component of mortgage payments, interest rates, is very low. As one readers of Athanassakos’s article said in the comments section:

“In 1990 I bought a house for $100,000 and my mortgage was about 12%, so the monthly cost to me was approx. $1,030. I recently bought a cottage and the price was $250,000. I have a 2.5% variable mortgage. My payments are approx. $1,100 per month. So the price is 250% more and the payments are the same except that 22 years ago when I bought my first house $1,030 was a STAGGERINGLY painful burden.”

Lastly, there are regional differences in the housing market. As another commenter wrote on the same story:

“[The] housing bubble in Canada is a tale of two cities, and the rest of the country. Yes, by most measures Toronto and Vancouver prices are too high, especially for condos. But I live in Calgary. We have not seen a huge increase in prices (since 2006-7) and prices are actually down a little in the last year. There are similar situations in Sask., Manitoba and the eastern half of B.C. I have family in Quebec and house prices there are far from inflated too.”

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