Housing market more balloon than bubble: economist

Canada will likely avoid a crash or serious correction in its “somewhat pricey” housing market, with the possible exception of Vancouver, says a new paper from the Bank of Montreal.

OTTAWA — Canada will likely avoid a crash or serious correction in its “somewhat pricey” housing market, with the possible exception of Vancouver, says a new paper from the Bank of Montreal.

The analysis by BMO economists suggests alarms about Canada’s housing market by international observers, from the International Monetary Fund to The Economist magazine, are exaggerated or simplistic.

“The main takeaway is that the national housing market appears somewhat pricey, but is far removed from a bubble,” said economists Sherry Cooper and Sal Guatieri in the report released Monday.

“In our view, the (market) is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a ’pin’.”

Even Toronto’s hot condo market — one of the subjects of many of the warnings — is more likely to cool rather than collapse, BMO said, noting that a sharp decline in construction for rental units is stimulating demand for condos.

The report estimates that half of new condos in the Toronto area are purchased by investors, and about 22 per cent are rented.

The one exception to the sanguine view appears to be Vancouver and parts of British Columbia, where home prices and demand from an influx of non-resident Chinese investment is elevating prices and construction. Home prices in Vancouver have climbed by 159 per cent over the past 10 years, more than 50 per cent higher than the national average.

“Bottom line is, we expect the Canadian housing market to cool down rather than bust over the next couple of years, with the possible exception of Vancouver and parts of B.C. which will likely experience further correction,” said Guatieri in an interview.

By cooling, he predicted that prices, sales and start-ups will essentially be flat this year and likely next.

Housing has become an area of concern for policy-makers over the last few years as Canadians continued to dip into the mortgage market to take advantage of historically-low interest rates. As a consequence, household debt to disposable income has shot to over 153 per cent, the highest in ever and close to the levels reached in the U.S. before the subprime crash.

Earlier in the month, Finance Minister Jim Flaherty said he was prepared to intervene for the fourth time in six years if there is no let-up in borrowing.

The BMO economists say the government, and the Bank of Montreal, are correct to worry about a continuation of the trend, but that is not likely. In fact, except for a few hot spots, that cooling trend has already begun with prices rising only by 0.9 per cent last year. Home starts have also dipped well south of the over 200,000 level.

Nor is it likely that Canada will fall into another recession, or that interest rates would rise so quickly that a significant number of households would be unable to meet mortgage payments.

Canadian households are not as vulnerable as their American counterparts, the economists say.

Canadian home ownership equity is 67 per cent in Canada, compared to 39 per cent in the U.S., and even debt-to-income ratios are far better in Canada when the cost of health care U.S. households must pay is factored in.

The report argues that many of the measures used by alarmists to suggest housing is due for a severe correction are exaggerated or simplistic.

On the important measures which gauge affordability, households are on firm ground. House prices to family incomes are elevated from 10 years ago, but not excessively so, at a ratio of 4.9 versus 3.2 a decade ago.

The exception again is Vancouver at 10, nearly double what it was a decade ago. Also elevated is Toronto at 6.7 versus 4.3.

“Let’s assume the worst case scenario and house prices fall by 10 per cent, would that affect anything?” asked Guatieri. “There has been such an increase in house values, that I don’t think it would pose a serious problem for Canadians or the economy.”

Guatieri said the situation would become a problem if home prices and household debt continued to outstrip income growth, but trends on both fronts are moderating.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Jason Kenney government receives ‘B-’ for cutting red tape: Canadian Federation of Independent Businesses

Alberta government receives highest grade on CFIB’s red tape report card

Tax revolt? Taxes energy companies owe Alberta municipalities more than double

The amount of unpaid property taxes that oil and gas companies owe… Continue reading

Edmonton liquor store looks to ID-scanning technology to combat thefts

EDMONTON — An Edmonton-based retailer of wine, liquor, beer and cannabis is… Continue reading

New federal climate think tank looking for a road map to zero emissions

OTTAWA — A new climate change think tank funded by the federal… Continue reading

Statistics Canada says manufacturing sales down 0.6 per cent in November

OTTAWA — Canadian manufacturing sales fell more than expected in November as… Continue reading

WATCH: Canadian kid shovelling snow video goes viral

Rory might just be Canada’s most popular toddler right now, thanks to… Continue reading

Your community calendar

Jan. 22 Downtown House Senior Center (5414 43 St.) in Red Deer… Continue reading

Lineups outside grocery stores in St. John’s as state of emergency hits Day 5

ST. JOHN’S, N.L. — Residents of St. John’s, N.L., were lining up… Continue reading

Prison watchdog decries ‘Indigenization’ of Canada’s correctional system

OTTAWA — Canada’s prison ombudsman says disturbing and entrenched imbalances mean the… Continue reading

Parks Canada says no to gondola proposed from Banff townsite to Mount Norquay

BANFF, Alta. — Parks Canada has rejected a proposed gondola to take… Continue reading

CFL reaches co-operative partnership agreement with Brazilian federation

TORONTO — Add Brazil to the CFL 2.0 initiative. The league announced… Continue reading

David Marsden: Warm tales about the cold

The recent deep freeze has rocked all of us. Every Red Deer… Continue reading

Richard T. Lee makes British Open, joining fellow Canadians Conners and Hadwin

SINGAPORE — Toronto’s Richard T. Lee is the third Canadian to qualify… Continue reading

Film probes radical black-Latino-poor white 1960s alliance

Civil rights activists were still mourning the 1968 assassinations of Rev. Martin… Continue reading

Most Read