News Releases

TORONTO, ONTARIO--(Marketwire - June 7, 2011) - According to a new housing report from BMO Capital Markets, the national housing picture in Canada masks major underlying differences in valuations among three of the country's four largest cities: Vancouver, Calgary and Toronto.

The report flags the possibility of lower prices in Vancouver, steadier to softer prices in Toronto and firmer prices in Calgary in the near future. In addition, Canada's real estate market is vulnerable to a correction if there is a rapid rise in interest rates due to higher inflation, an increase in unemployment because of a weak U.S. economy, or a slowing in foreign investment.

Nationwide, average existing house prices have more than doubled in the past 10 years, hitting new highs in April. "Prices are 5.1 times median family income and housing costs an extra two years of gross income compared to 2001, when the boom began and valuations were closer to historic norms," according to Sal Guatieri, Senior Economist, BMO Capital Markets.

"Due to historically low interest rates, affordability isn't a major issue yet, with first-time buyers allocating about one-third of their disposable income for mortgage payments on an average priced house. But high valuations suggest that even a moderate increase in interest rates will slow the market in coming years," added Mr. Guatieri.

Katie Archdekin, Head of Mortgage Products, BMO Bank of Montreal, adds that in light of expected interest rate hikes in the year ahead, Canadians need to examine ways to reduce overall housing costs.

"While recent survey numbers tell us that two thirds of Canadians will be able to service their mortgage in the face of rising interest rates, it's still crucial that Canadians stress-test their mortgage against a higher rate to ensure they can afford what they sign up for if conditions change," said Ms. Archdekin.

BMO Housing Report:

Vancouver – Lotus Land Valuations:

Riding a wave of wealthy immigrants, Vancouver's house prices have nearly tripled in the past decade. Demand from China has been strong, supported by fewer travel restrictions, stricter purchase rules and high prices in China. The average priced home in Vancouver is now 11.2 times family income, more than double the ratio of a decade ago. After running only modestly above Toronto's prices in the early 2000s, Vancouver is now 71 per cent higher.

According to Mr. Guatieri, Vancouver's lofty valuations imply a market that is priced for perfection and subject to an elevated risk of a correction. "Four corrections in the past three decades saw declines averaging 21 per cent. However, if interest rates stay low and wealthy immigrants continue to pour into the city, prices could stabilize sooner than in past downturns."

Toronto – High Valuations, Again:

Greater Toronto house prices have nearly doubled in the past decade, and now sit at 6.7 times family income, compared with 4.3 times in 2001. This is comparable to valuations reached in the late 1980s, which led to a 25 per cent reduction in prices. But the key difference now is that mortgage rates are below four per cent instead of near 14 per cent, which supports affordability. That said, while high valuations may be sustainable in an ultra-low rate climate, they could come under pressure in a more normal rate environment.

"Given our outlook for a moderate increase in rates in the next two years, prices could soften or at least stabilize for a while. A possible overhang of condos could aggravate the weakness. However, continued sturdy immigration, with one-third of the nation's immigrants – 92,000 people – settling in the GTA last year, should help to cushion the blow," said Mr. Guatieri.

Calgary – More Reasonable Valuations:

Soaring oil prices and rapid in-migration led to a doubling in Calgary's house prices within four years, making the city Canada's housing hot spot five years ago. But lofty valuations, a pullback in oil and the recession spurred a 17 per cent correction between mid-2007 and early 2009. Although the market has recovered more than half of its losses, Calgary is still one of the few Canadian cities (Edmonton is another) that have yet to reclaim pre-recession peaks.

"However, valuations have improved since 2007, with prices at 4.2 times income, less than the national norm. Barring a sharp pullback in energy prices, Calgary's house prices stand a reasonable chance of growing alongside incomes in coming years," said Mr. Guatieri.

To view the full report please visit: http://bmonesbittburns.com/economics/focus/20110610/feature.pdf