The International Monetary Fund recently released an
economic report on Canada that included an analysis of Canada's housing
market. Based on a detailed study that
included immigration trends, household income, mortgage rates, and the rental
market, the IMF concludes that Canada's housing market is overvalued by 10-15% (as
of the third quarter of 2012). While the
report suggests that there has been some overbuilding, it concludes that excess
supply remains modest.
Overall, the authors do not express any particular
alarm. While they cite downside risks,
their "baseline" scenario is a "soft landing," where
nominal house prices are flat, or down slightly, over the next few years, with
inflation slowly closing the gap between price and value. While reduced housing starts and softening
prices will drag on economic growth, it will not dramatically reduce
expansion. The (mostly) responsible lending
practices and homeowners' significant equity mean that it's unlikely Canada
will suffer from a US-style housing crash, the report concludes.
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