Despite a plethora of alarmist reports in recent months, a newly released report from the economic research team at BMO Nesbitt Burns plainly states that home mortgage and housing markets in Canada are decidedly not “a bubble ready to implode à la the U.S., Ireland, Britain, and Spain, where prices have dropped 22% on average.”
Critiquing the methodology of a recent analysis in The Economist, which indicates Canadian housing is “overvalued” by as much as 24 percent based on the ratio of rent-purchase prices, BMO economist Earl Sweet and Sal Guatieri make a strong case that comparisons based on personal income-to-home prices and today’s current low interest rate environment show a home mortgage and housing market that is far more robust than that reported in The Economist. “Even with the notable rise in house prices during the past few years,” they note, “mortgage service costs ) including principal) for typical buyers of an average-priced house, are running close to long term norms of 34%.”
Mssrs. Sweet and Guatieri concede that a sudden three percent increase in interest rates would weaken affordability and result in falling demand and prices; however, they emphasize that such a spike in mortgage rates is highly unlikely. Indeed, they forecast quite the opposite scenario. “Even when market rates normalize, they note, “average borrowing costs are unlikely to escalate materially from current levels as more customers lock into fixed-term contracts at relatively low rates. In addition, given substantial excess capacity, mild inflation and weak economic recoveries in the advanced nations, the normalization of interest rates could take several years, with Canadian interest rates rising a moderate 2-to-3 percentage points. By then, incomes should catch up to prices.”
“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,” they conclude that, “the adjustment in the ratio of Canadian house prices to personal income toward its long-term trend will likely involve just a modest decline[[of no more than 5%] in prices,” and such decline would be “coupled with a continuing increase in personal incomes.”
The Canadian home mortgage and housing markets are, thus, more stable than some analysts and alarmists would lead us to believe.
