BMO States Pricey Houses are not Sign of Bubble

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Housing values in Canada are merely “overvalued”, not facing a housing bubble on the verge of bursting, according to economists at BMO Nesbitt Burns.

The BMO economists are saying that in comparison to the personal incomes of Canadians, Canada property prices are only moderately higher than real value. Mortgage servicing costs for the average Canadian homeowner are still leveling at a normal 34 per cent.

“Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur,” BMO’s Earl Sweet and Sal Guatieri wrote in a recently published research report entitled Canadian Housing: Pricey, Not Dicey.

The report showed that though the Economist found that Canadian housing prices were overvalued by 24 per cent, in comparing prices and rent costs, the formula used may not be entirely representative of the actual housing situation in Canada. Of the 20 countries the Economist included in its study, the average over-valuation hit 20 per cent, with only four countries found to home property over-valued by less than 10 per cent.

Being that more Canadians opt to utilize the availability of low mortgage rates to purchase their own homes, the renter to homeowner ratio decreases, thereby decreasing the ratio of rents generated from properties at a modestly over-valued price. This does not necessarily convey a bubble, but a shift in how Canadians choose to live. Supply and demand is an economic rule. The more Canadians who choose to own, the greater the value of home ownership becomes. The less renters in the market, the lower rent generations become.

The BMO economists suggest that holding housing prices against average Canadian incomes is a better determinate of over-valuation. By using this strategy, the team determined that over-valuation in Canada is likely closer to 11 per cent this year, not 24.

“Given our view that economic growth will continue at a moderate pace in coming years, with gradual declines in the unemployment rate and only moderate increases in interest rates, the adjustment in the ratio of Canadian house prices to personal income toward its long-term trend will likely involve just a modest decline in prices coupled with a continuing increase in personal incomes,” states the BMO report. “The price decline will likely be limited to a further five per cent.”

“The fact that housing demand and supply are currently balanced also weighs against a sharp drop in prices.”

The report also notes that over-valuation is greater in some areas of the country than others. Alberta and Ontario have greatly recovered from their over-valuations with rises in average incomes, while expensive Vancouver and other areas of BC see higher rates over-valuation than the national average as increased numbers of foreign purchasers buy up properties and drive up prices.

While the housing bubble of the United States is very unlikely to emulate itself here in Canada, one factor to remain cognizant of is if interest rates stay low and encourage buyers to purchase property that won’t be able to afford their loans should mortgage rates rise, there could be a problem.

Be wise in your home purchase. Get pre-approved, discuss your home buying plans with a reputable mortgage broker, and leave flex-space in your financial budget.

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