Take a look at the two charts below, which benchmark resale home prices to income and rents in Canada. Both show home prices in overvalued territory (while resale home prices have slipped from record highs, they are still running at 17% YoY). Relative to labour income, home prices are about 1.5 standard deviations above norm (data going back to 1980). The situation is even more dire when we look at resale home prices versus rental prices — this metric is over 2.5 standard deviations above the average, which is very reminiscent of what we saw in the U.S. in 2004-2006. Our statistical work implies that given current income and rent, we could see a price correction of around 15-35% if these ratios were to mean revert, which would certainly be a U.S.-style correction.

via Breakfast with Dave


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