Is the market overvalued?
Growth in real MLS® home prices in British Columbia averaged 4.8 per cent between 2000 and 2004, while real after-tax income increased at an average annual rate of 1.9 per cent. While inflation-adjusted prices are rising faster than inflation-adjusted after-tax incomes, the disparity during the current up-cycle is small compared to past upswings.
During the 1986 to 1989 housing expansion, real MLS® prices grew at a 13.5 per cent annual rate compared to a 0.6 per cent annual increase in real after-tax income. In 1990, real house prices fell by 1.3 per cent, a modest correction. The real price growth of the current up-cycle is more in line with real income growth than experienced in the past.
While house prices are rising in British Columbia, this indicator suggests there is no real estate bubble.
Reprinted with permission of CMHC. Source: Housing Market Outlook, Fourth Quarter 2005 Edition, page 8. The electronic edition of this and other CMHC Market reports are available for free on CMHC’s website at: www.cmhc.ca.