A tale of two markets

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The price gap between Canadian and American home values is what is feeding worries about a potential housing market correction in Canada, according to BMO economists; but one other big bank’s economists quickly shot down that notion.

“One reason why it’s unwise to compare the Canadian housing market of today to the U.S. market before it crashed is that, unlike the situation stateside, there isn’t anywhere near the same degree of overbuilding in Canada relative to household formation,” CIBC economists Benjamin Tal and Andrew Grantham wrote in their latest economic insights report. “In fact, the ratio of housing starts to household formation is not far from its long-run average of 1.03.”

The report was published days after a similar BMO document that claimed the price gap between American and Canadian homes is feeding worry of a potential housing correction.

“What makes this recent period of relative calm between the two national markets so notable is that Canadian prices took about a 60-per-cent step ahead of U.S. prices in a six-year span from 2006-2012,” Doug Porter, chief economist of BMO wrote in a research note earlier this week. “It’s this gap that - to this day - has so many calling for a deep correction in Canada.”

However, according to Tal and Grantham, those prices may be in line with demographics – especially in major cities such as Toronto, Calgary, and Vancouver, which have always earned the most criticism regarding overvalued properties.

“What has limited dramatic overbuilding in those centres is immigration. The three largest cities take in roughly half of all new immigrants into Canada,” they wrote. “That means they are disproportionately benefiting from a demographic boost that new Canadians are providing. Immigration has accounted for around three-quarters of population growth in Canada recently, and crucially for the housing market a greater proportion of those new immigrants have been of prime home-buying age than in the past.”

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