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Housing: No Bubble, Just Pricey, Says BMO

No-Bubble-Says-BMOClaims that Canada’s housing market is ready to pop are exaggerated, say economists at BMO Nesbitt Burns.

Instead, they say the market can more realistically be labelled “moderately overvalued” based upon a comparison of house prices with personal income.

They also note that mortgage servicing costs for “typical” homebuyers are running near the long-term norm of 34%.

“Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur,” economists Earl Sweet and Sal Guatieri wrote in their research report.

They noted, however, that Canadians would have a hard time dealing with a sudden 3% hike in mortgage rates. That would weaken affordability “substantially” and in turn drive down demand and home prices.

They downplayed this risk, though, pointing to the prevalence of fixed rates in mortgage financing, which reduce fluctuations in borrowing costs.

Sweet and Guatieri also predict the normalization of interest rates could take several years yet, with Canadian rates rising 2 to 3 points in that time. They believe incomes should catch up to prices by then.

More worrisome, they argue, is prolonged low interest rates, which could “recharge the housing market and inflate a true bubble that ultimately bursts when rates normalize.”


By Steve Huebl, CMT