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Buying In An Overvalued Real Estate Market?

December 17, 2013
It’s not the first time that I hear about the Canadian housing market being overvalued. Deutsche Bank came up with a simple yet powerful way to determine if prices were overvalued or not. How?

They use 2 key metrics:

-Home price/rent (vs historical average): In theory, the ratio between buying and renting price. Why? Because it does not make sense for prices to increase much more rapidly than rent, that has proven to be unsustainable.

-Home price/income (vs historical average): If income is rising by X%, real estate prices should increase by more or less that % as well. If not, it would generally mean that the population is using more debt to afford the expense which is obviously not sustainable.

So the economists looked at metrics for the 2 by country and used the average between the 2. The result?

Canada which is very frequently in the discussions of the most overpriced real estate (with Australia) is on the very top of this list.

That is more source of concern for me as I continue to look into buying real estate. Does this mean I should postpone my plans? It’s certainly tempting. I could even look into buying in a country where prices are too low. I doubt buying in Japan or Korea would make sense but seeing that US prices are below historical prices makes it tempting.

Would you still be willing to buy real estate in a market like Canada? Or you’d try to get into an undervalued market even though it would be more complex and costly to do?

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