Monday, January 30, 2012

From the Canadian Press

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% 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% over the past 10 years, more than 50% 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%, 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% 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% in Canada, compared to 39% 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%, 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.
Originally published on



patriotz said...

"BMO said, noting that a sharp decline in construction for rental units is stimulating demand for condos"

That's backwards of course, purpose built rentals are not being built because of excessive market price for condos relative to rental value.

If lack of rental accommodation were actually stimulating demand to buy condos we would see market rents increasing relative to the cost of buying, when of course the direction is the other way.

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

So the other 33% purchased by investors are being left empty? Or are they really saying that 22% of the total stock of condos is owned by investors while 50% of new stock is bought by investors?

Either way not too positive for the market.

patriotz said...

"So the other 33%"

The other 28% of course: 50% - 22%.

johnberkowitz said...

The second part of the article says it. Even if there would not be a real housing bubble, the levels of household debt are insane. We don´t realize, that this is unsustainable in the longer term (till 2050). What we need now is to lower theCanadian inequality, which keeps growing. I think that housing market has a large share of the guilt on the current situation.

jesse said...

I am wondering how stiff rents are these days, I think part of the apparent tightness (low vacancy and about 4% rate rise yoy) is due to temporary factors. Completions look to increase in 2012.

I'm skeptical rising rents are sustainable without more income growth.