Canadian real estate is receiving a big warning sign from an indicator that was an alarm for the US in 2006. The house price-to-rent ratio shows Canadian real estate is overvalued. When contrasted to the US is when you really get a feel for how much Canada went all-in on real estate. It makes 2006 America look like a sleepy backwater market of value investors.

House Price-To-Rent Ratio

The house price-to-rent ratio is an indicator used to gauge overvaluation. It compares the cost of a home to the cost of renting a similar place. Since rent is a fundamental indicator tied close to income growth, it tends to be mostly stable over time. That is, it reflects a change in earnings or productivity. As opposed to home prices, which mostly reflect access to credit.

When home prices grow faster than rents, it means valuations are becoming stretched. Persistent growth means prices are becoming overvalued. US economists feel this was one of the…

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