Hyperbolic new Goldman Sachs report warns of elevated risks in Canadian real estate market
You may have read some alarming headlines May 16th, warning that Canada is in the top three G-10 countries most at risk of a housing “bust,” according to a new report from Goldman Sachs that was obtained by Bloomberg News.
For those who missed the wider media coverage (Financial Post story here and New Zealand Herald story here, as examples), the global investment bank analyzed real estate market conditions across the G-10 countries. It compared house-price levels using three metrics: the ratio of house prices to average rents, the ratio of average house prices to average household income and average house prices adjusted for inflation.
Goldman Sachs found that New Zealand was most at risk of what it describes as a housing “bust” following that country’s average real estate price rise of 60 per cent since 2010.
“Using an average of these measures, house prices in New Zealand appear the most overvalued, followed by Canada, Sweden, Australia and Norway,” said the report, according to Bloomberg.
Bloomberg adds that another graph in the report shows that New Zealand’s probability of a housing bust in the next two years is just over 40 per cent, with Sweden second at slightly over 35 per cent. The risk of a bust in Canada comes in third place at about 30 per cent.
Sounds alarming, doesn’t it?
Well, hold up a second. What exactly does it mean by a housing “bust”?
Closer examination of this story reveals that Goldman Sachs’ definition of a “bust” is when average house prices fall by five per cent or more, after adjusting for inflation.
Now, I don’t know about you, but that hardly seems like a bust to me. A fall in average prices of five per cent? We’ve seen that happen here in Vancouver over the past six months and prices have already almost completely recovered. I don’t think anybody would call that a “bust”. Even across the whole of Canada, a drop in average prices of five per cent would merely take us back a couple of months (average sale price for April $559,317, which is two per cent higher than March’s $548,517 and seven per cent more than February’s $519,521).
Further, Goldman’s report puts the “risk” of this happening in Canada at around 30 per cent. So, what the bank is essentially saying is that there is a 70 per cent probability of Canadian real estate prices not falling as much as five per cent over the next two years. Indeed, a 70 per cent chance that prices will do anything between falling less than five per cent and increasing by, well, any percentage you could name.
Come on, Goldman. That’s hardly enough to have us quaking in our boots.
Bloomberg cites that Goldman’s report also said, “Australia, Norway and Canada appear overbuilt,” with home-building activity outstripping the demographic demand for housing. Really? Tell that to all the people who are trying to get their hands on a home in Metro Vancouver and Greater Toronto.
And the real kicker? Bloomberg graciously points out that Goldman Sachs admitted its model is “just one tool” in measuring housing market risk and that it has “a few key drawbacks,” including predicting housing busts too often.
I’ll leave you to draw your own conclusions.