No housing bubble in Canada: BMO

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There will be no crash to the Canadian housing market, according to a new report by BMO economists out this week. Instead, the report suggests, there will be something like a smooth landing.

While discouraging doom, the report falls short of offering any specific predictions of its own.

“In our view, the housing boom will more likely cool than correct, even in condo-driven Toronto – the target of many scary headlines,” said BMO economists Sherry Cooper and Sal Guatieri.

They add that an “unforeseen shock,” such as a sharp increase in interest rates or severe recession could set off a more severe drop in home prices, but neither scenario is considered likely, according to the report authors.

While a recent ranking by the Economist magazine suggests Canada’s housing market could be overvalued by as much as 63 per cent, the report sought to discredit the method of comparing national house prices to rents. If such a method really could predict housing bubbles, than there’s no explanation as to why data from the 1980s using this price to rent ratio failed to show any sign of the Toronto housing bubble.

Along with Toronto condos, Vancouver was highlighted as a possible exception to an otherwise stable real estate future in Canada, however. The report noted prices have jumped 159 per cent there in the past decade, and the average price to family income ratio has essentially doubled from 5.4 in 2001 to 10.0 in 2011. The national ratio in 2011 was 4.9, compared to 3.2 a decade earlier.

As has been suggested before, the Vancouver jump in prices is linked to a recent surge in Chinese mainland buyers, the BMO economists said.

“This explains why the city is ranked the second priciest, after Hong Kong, of 325 urban centres in Demographia’s annual survey comparison of prices and resident incomes,” said the BMO report. “Both of these cities boast an enormous inflow of capital from non-resident Chinese nationals, a factor that has apparently boosted Toronto’s home prices relative to income as well.”

Statistical evidence of such a powerful influence coming from China remains lacking in Canada thus far, however, despite the continued anecdotal evidence.

Not all cities in Canada have seen such dramatic price increases recently, however. Windsor, for example, remains undervalued, according to BMO, having seen prices gain just 20 per cent in the past decade.

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