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Study says Canadian house prices overvalued by 23.9% Add to ...

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Canadian house prices overvalued, study says Canadian house prices are overvalued by 23.9 per cent, The Economist says in its latest survey of global real estate markets.

House prices in Canada climbed 4.5 per cent in the magazine's latest survey from a year earlier, compared to a decline of 3.8 per cent in a reading for the third-quarter of 2009.

Between 1997 and 2010, prices rose 70 per cent, the magazine said.

While the market overvaluation in Canada can be considered high, it paled in comparison to several others, such as Australia at 63.2 per cent, Hong Kong at 58.1 per cent, France at 42.5 per cent, Sweden at 41.5 per cent, and Spain, whose government is drowning in debt and where unemployment is raging, at 47.6 per cent.

Notably, The Economist found that house prices in China, where the government has taken steps to cool the market, were up 9.1 per cent with prices overvalued by 18.1 per cent.

A handful of countries, including Germany, Switzerland and Japan, had markets that are undervalued.

The Economist says it bases fair value on comparing the ratio of house prices to rents with its long-term average.

Separately today, BMO Nesbitt Burns looked at price changes, annualized and inflation-adjusted, over five years and found the Toronto average up just 3 per cent. "We're in a different universe from the late 1980s boom, which begat the early 1990s bust," said deputy chief economist Douglas Porter. "Real price gains have been incredibly consistent in the past decade."

Vancouver has been the one city closer to "boom-like pricing," up 3.9 per cent in real terms on average in the same period, Mr. Porter said. Again, that's "hardly frothy," given the steep decline in interest rates. And, Mr. Porter said, Vancouver "often marches to its own drummer, and is hardly a bellwether for the country as a whole."

Currencies volatile after G20 meeting The U.S. dollar sank this morning and the Canadian dollar climbed sharply in the wake of a G20 finance meeting that ended with just vague pledges amid heightened currency tensions.

While the meeting of finance ministers and central bankers in South Korea focused heavily on foreign exchange volatility, "there was nothing really firm in there to halt the decline of the U.S. dollar, so the risk is out of the way," said Scotia Capital currency strategist Camilla Sutton.

The G20 finance officials pledged in their communiqué to refrain from "competititve devalution" of currencies, the flashpoint in trade tensions, and to pursue policies that would bring down high trade imbalances. That was nowhere near what U.S. Treasury Secretary Timothy Geithner was pushing for, but, economists said, it does lay the groundwork for the broader G20 meeting in November.

"We think the communiqué will take some temporary pressure of the 'currency war' refrain; however the significant and persistent economic problems will likely make it easy for a backward slide," Ms. Sutton said.

The greenback hit a 15-year low and the loonie shot above 98 cents U.S. as markets took the G20 pledge as basically leaving the status quo in place. The loonie gained 0.63 of a penny to close at 98.01 cents.

Markets are still anticipating that the Federal Reserve will launch a new offensive next week known as quantitative easing, which has been knocking down the greenback. There are somewhat differing views going forward, though:

"Markets took the G20 outcome as a green light to get back to the business of selling [the U.S. dollar]across the board ... We retain our base case view that the [U.S. dollar]selloff is running out of steam. In the longer-run, more [foreign exchange]co-operation should actually ease the pressure on [the U.S. dollar]" said Elsa Lignos, currency strategist at Royal Bank of Canada Europe.

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