Recently, three institutions in three different occasions said the same thing – Canadian housing market is overvalued.
High housing prices in certain large cities and household debt pose financial stability risks that should be addressed.
The Economic Survey of Canada recommends policymakers move to reduce housing market risks. It calls for a tightening of mortgage insurance, so as to cover only part of lenders’ losses in case of mortgage default.
Even when housing busts do not have a large financial stability impact, they can affect the real economy. Research shows that recessions in OECD countries are more likely given a house price bust.
Bank of Canada:
While the Bank continues to see a constructive evolution in housing market imbalances and household credit, valuations are stretched, there is overbuilding in some parts of the housing market, and household indebtedness remains high.
All those reports point towards a housing related financial risk but how much of an actual risk exists in the market – everyone failed to evaluate.