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Domestic housing prices have climbed 83 per cent over the past decade. For most Canadians, this is sufficient proof the residential real estate market is overvalued. But Lakehead University economics professor Livio Di Matteo argues that the increase in household income and population almost completely justify the rise in housing prices.

In short, Canadian homes are fairly valued – and this is particularly true of the major centers of Vancouver and Toronto.

Mr. Di Matteo compared housing prices in Canada's largest 30 cities with the primary forces driving real estate demand – median wage growth and population. He found (through regression) that rising income and population explained 60 per cent of the change in average selling price.

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He then worked backwards, estimating a fair value for housing based on income and population expansion for each city. Afterwards, Mr. Di Matteo compared the estimates with actual prices. His assumption was that cities where home prices rose significantly more than income and population were more likely to be over-valued.

The results were startling. In Toronto and Vancouver – ground zero for the alleged housing bubble – home prices were almost exactly in accordance with the income and population model. This suggests that the jump in residential prices for Toronto and Vancouver is justified to some extent by fundamental factors.

The Canadian cities with the most overvalued real estate prices according to his analysis are Regina, Thunder Bay, Winnipeg, Hamilton and Windsor. The most undervalued are Moncton, Calgary, Edmonton, Victoria and Halifax.

Professor Di Matteo's model is a blunt tool and he is by no means suggesting it alone constitutes the definitive study on the subject. It is, however, more sophisticated and useful than "prices are high so they must be a bubble." By measuring home prices against demand, he has made a valuable – and for homeowners, encouraging – contribution to the discussion.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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