Deutsche Bank gets it wrong - Real Estate Prices are Not Overvalued by 60%
In December Deutsche Bank released a report of the world’s most overvalued real estate markets and toping the listing was Canada which they estimated was 60% overvalued.
From the Wall Street Journal:
Based on their analysis, anyone in the market for property might want to avoid Toronto or Vancouver.
Last week economists lined up to highlight problems with Deutsche Bank’s methodology, specifically the data behind the house price to rent ratio they used to assess how overvalued the real estate market is. The theory is that in a balanced market house prices should be appreciating at a similar rate to rents, when houses are appreciating faster than rents the market might be overvalued. It turns out that the rent data Deutsche Bank used as part of their analysis understates actual rents because the data is quality adjusted.
In the case of Toronto, the quality adjustment has the effect of assuming that all renters are renting apartments in the old stock of purpose built apartment buildings. It ignores the fact that virtually all the new rental apartments coming on the market in Toronto have been in condominiums which are 40-50% more expensive than apartments in traditional apartment buildings.
Two years ago I wrote a more detailed post titled Analysing Toronto's real estate market: how can so many be so wrong where I talked about the problems with using this kind of data to analyze Toronto’s real estate market.
We are not going to see 70,000 condo completions over the next 2 years
TD Bank released a report last week forecasting an 8% decline in condo prices over the next two years.
One of the key factors behind TD’s forecast is this observation:
“the high-rise segment is facing excess supply as some 70,000 units are completed over 2014 and 2015.”
The above observation appears to be based on the following data from Realnet showing scheduled condo completions over the next four years.
Anyone who keeps a close eye on Toronto’s real estate market knows that there are a couple of reasons why we are not going to see 70,000 condo completions over the next two years, even though the above Realnet chart suggests we might.