Wednesday, 12 March 2014

Nouriel Roubini & Will Dunning on the Canadian Housing Market

No one is perfect! Be it Roubini or Dunning.

While Roubini predicted the US housing crash, he is not necessarily well educated about the Canadian housing market. In the video above he makes two mistakes. First he says home prices in Canada are overvalued against rents by 50% and by 60% against incomes when in reality it's vice versa. Real estate is more overvalued against rents (68%) than incomes (32%). Secondly, Roubini has no awareness of the scale of this bubble as he points out how some markets (like the condo market) are overvalued and others are not.

Finally, Roubini only sees a 5% to 10% correction the housing market. Really? Let's put things in perspective. A 10% correction would bring the average home price in Canada from $389,000 in 2013 to the mid-2010 level of $350,000 (which is still 113% increase above year 2000 prices). Roubini said that if things go really bad only then the real estate market might drop by 20%.

Switching from bears to bulls, Will Dunning (who also serves as chief economist for the Canadian Association of Accredited Mortgage Professionals) came up with a different report which proclaims that the housing market in Canada is actually undervalued by as mush as 20%. Nevertheless, he does make a valid point in his analysis stating that the price-to-rent ratio compiled by OECD overestimates the overvaluation.

According to OECD home prices in Canada are overvalued north of 60%. However Mr. Dunning concludes that the rent data is based on a rent component of CPI which severely underestimates annual increases in rents. But if this is really the case, this is the first time a major economist has admitted that CPI underestimates inflation.

So if rental inflation is understated what are the chances that energy and food inflation are also being low balled? Is our government trying to scam us?

Moreover Mr. Dunning presents an alternative price to rent ratio based on a "better data set" which relies on real estate agents estimating rents. Hmm, the last time I googled the word "estimate" it was defined as a rough calculation or as a guess.


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