Toronto to cause correction?

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Canada’s largest housing market may be cause for an eventual correction, with a new outlook from BMO Capital Markets pointing to an unsustainable mix of accelerating Toronto home prices and eventual rate hikes.

“In Canada, accelerating home prices in Toronto (7.1% y/y in January) risk straining affordability further, causing a correction when interest rates normalize and the market is trying to absorb a record number of newly built condos,” Sal Guatieri, senior economist for BMO states in his North American Outlook, published Monday.

And despite a period of sluggish sales, markets are still stable in most parts of the country.

“Led by Vancouver, Calgary and Toronto, home sales have rebounded to past-decade norms, despite slowing recently,” Guatieri states. “Markets are generally balanced, though sellers hold the upper hand in Calgary.”

While Canada’s major markets may be leading in house price gains, the entire country has seen a slight uptick in prices; with gains in central and western Canada making up for a drop in prices out east.

“House prices picked up to a 4.3% pace in December, in line with income growth,” Guatieri states. “Prices are generally rising west of the Ontario/Quebec border, but sagging in the eastern provinces due to soft demand and elevated listings.”

These gains, however, are expected to slow due to impending rate hikes to come this year.

“In 2014, moderately higher long-term rates should apply a gentle brake to housing activity and price gains, even as new immigrants and echo boomers provide ongoing support,” Guatieri states. “Steadier sales and starts are expected in most regions this year, while the western provinces and Ontario should see more subdued price gains.”

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