The Globe’s Market blog and The FP’s Posted both provide us with a sobering outlook for Canadian property with some interesting data from Merrill Lynch Canada’s economist, David Wolf. My favorite part of the pieces:

“The ratio of house prices to incomes is also a troubling statistic: It is now about 4:1, meaning that the average house price is four-times the average household’s annual income. During the previous cyclical peak, in 1989, the ratio topped out at 3.2:1. Even more troubling, the U.S. market topped out at 3.9:1 in 2006, just before doom set in.”

So Canadian property prices are less affordable than the 1989 peak? Strangely, that’s the first time I’ve heard an expert admit this. Usually, experts argue that while affordability has deteriorated, it hasn’t gotten as bad as the last peak. The difference? The massaging of data. Consider this:

• Merrill Lynch’s economist looks at home prices/income
• Property bulls tend to look at mortgage payments/income.

Using mortgage payments/income, things don’t look as bad as 1989 simply because mortgage interest rates are currently 500bp lower than in 1989! So even though house prices have skyrocketed, the property bulls have been trying to convince us that they’re still affordable. But over the long-run (especially with those sketchy 40-year mortgages) you’d be an idiot to bet that mortgage rates are always going to be this low.

This is an important reminder on how “experts” can mislead with data. The experts today are often reminding us that Canada’s property market is not as overheated as the U.S., but these same pundits often work for the institutions that would stand to lose the most if property prices decline. I certainly don’t remember the experts in Los Angeles or Florida telling people to sell their homes two years ago.