According to research by Oxford Economics, the whole world is in a property bubble and Canada is the second riskiest, after the Netherlands. They used a price versus rent ratio versus historical ratios and found that Canadian prices are about 299 times one month’s rent. For a good investment, you usually don’t want to pay much more than 100 times one month’s rent. That, in fact, was the global average ratio in 1990.
Canada did not experience as much of a real estate correction as the U.S. did after the peak in 2006. That is possibly because Canada had not fully recovered from its last crash, or because of a lot of Chinese money pouring in to a small country.
Psychology has a lot to do with whether or when a property market crashes. When the U.S. had its last crash, the wisdom in Canada was that their banks were stronger and that they did not allow the low-down payment loans that the U.S. had allowed. That is probably why Canada’s real estate is now much more overpriced than the U.S. market, at 299x one month’s rent. By comparison, in the U.S., the average number is 137x.
I have discussed in previous articles how to use cap rate (more sophisticated analysis) and multiples of rent (quick and dirty analysis) to evaluate deals. If you find high cap rate positive cash flow real estate, in an area that is not declining in population or jobs, it is still a good deal regardless of world economics. That positive cash flow will allow you to hold during bad times so any loss is just a loss on paper. In the meantime, you have that income that (if you performed your analysis correctly) is higher than what you could have achieved in a certificate of deposit.
Other countries with high price to rent ratios included Australia, with a price to rent ratio of 317, Sweden with a price to rent ratio of 256, Belgium, with a price to rent ratio of 224, the Netherlands, with a price to rent ratio of 212, Norway, with a price to rent ratio of 204, Denmark, with a price to rent ratio of 192, France, with a price to rent ratio of 166, and the UK, with a price to rent ratio of 145.
Countries with reasonable price to rent ratios (in which it should be possible to find positive cash flow real estate) included the USA, with a price to rent ratio of 137, Germany, with a price to rent ratio of 118, Switzerland, with a price to rent ratio of 102, Finland, with a price to rent ratio of 79, and Japan, with a price to rent ratio of 53. Before you go running off to Japan with your checkbook, keep in mind that Japan has a declining population and that values tend to go down there over time.
In concluding that Canada’s bubble is the second biggest in the world, the economists also considered prices versus the long term trend, price to rent ratio versus the long term trend, and change in mortgage credit in GDP from 2017 to 2021. For example, Canadian mortgage credit to GDP increased by 2.1 points from 2017 to 2021. That is reasonably healthy except that Canada’s mortgage credit to GDP at the end of 2020 was 112% versus the global average of about 70%. In other words, mortgage debt is higher than GDP in Canada. Countries with a high increase in mortgage debt versus GDP from 2017 to 2021 were Norway at 19.5%, Belgium at 15.1%, and France at 12.3%. In the U.S., we actually had a decline of -1% from 2017 to 2021. Our mortgage debt versus GDP declined in that time-frame.
Looking at prices versus the long term trend, the Netherlands was the highest, at 14.3% higher, Germany was second highest, at 12.5% higher than long term trend, the USA was third highest at 12% higher than long term trend, Denmark was fourth at 7.5% higher than long term trend, and the UK was fifth at 5.5% higher than long term trend. Countries with reasonable numbers versus long term trend were Sweden at 3%, France at 2.8%, and Japan at 2.8% higher than long term trend. Countries that were inexpensive relative to long term trend were Belgium at 0.9%, Australia at 0.2%, Finland at -1.6%, Norway at -1.8%, and Switzerland at -4.3%. These numbers are less important than price to rent ratios, though, in determining whether you are likely to have positive cash flow.
Looking at the price to rent ratio versus the long term trend, the Netherlands had the worst number at 15.3% higher, followed by the U.S. at 10.9%, Canada at 9.4%, Denmark at 8.8%, Germany at 8.7%, and Japan at 8.4%. Some countries may have different “good” price to rent ratios than others. It may be possible to obtain a positive cash flow when paying 130x one month’s rent in one country versus 100x one month’s rent in another county if expenses such as property taxes or insurance are vastly different in one country versus another. By comparing the price to rent ratio versus a long term trend, bubble conditions become more apparent.