Since Monday, there has been a lot of talk in the real estate industry about BMO’s latest report on Canada’s housing market.
First, let’s get some definitions out of the way. The word “bubble” has been used a lot since the recession started a couple years ago. But what does it mean? Basically, the value of property has increased to an unsustainable level and then falls. This is what happened in many states where you now see properties sell for a fraction of the price when originally purchased. That’s the simple answer 🙂
The “balloon” is a new term that better describes the state of real estate across Canada. What it basically means – and as you can read below – is that instead of popping like a bubble, property values are deflating slowly. According to this article, by the time these values should make an impact, inflation will have leveled it out.
So, you’re probably asking if you should be worried. Here is my take; be smart with your money. Know how much you can spend, and keep it in line. Luckily, real estate in Canada is fairly stable. Even better, in Barrie the average price of homes continue to rise every year (and often every month)! Buying a home is generally a good investment, and right now with mortgage rates so low, it’s a great time to jump in the market.
Courtesy of BMO Financial Group
TORONTO, ONTARIO–(Marketwire – Jan. 30, 2012) – The housing boom in Canada is more likely to cool than correct, according to a new special report released today by BMO’s Economics Department.
“With the exception of a few regions, valuations remain only moderately high across the country, especially when low interest rates, demographics, construction costs, land-use regulations and foreign capital inflows are considered,” said Sherry Cooper, Chief Economist, BMO Financial Group. “Low interest rates should hold affordability in check for some time, allowing incomes to catch up with higher prices and restore proper valuations.”
Balloon, not a bubble
According to the report, elevated valuations do imply the risk of a material correction in the event of a shock, such as a spike in interest rates, a severe recession or stalled foreign investment. “Barring one of these triggers, however, a dramatic correction is unlikely,” suggested Dr. Cooper. “In our view, the national housing market is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a ‘pin’. In most regions, where valuations are just moderately high, the air should seep out slowly, as rising incomes catch up with higher prices, allowing valuations to normalize before interest rates do.”
Dr. Cooper added that while household debt in Canada has been a point of concern, debt levels relative to income are not as troublesome as some suggest and likely will not trigger a severe market correction. “Contrary to some reports, Canadians have nowhere near the debt burden of Americans at the peak of the housing bubble. Even today, after four years of U.S. deleveraging, household debt ratios are lower in Canada.”
Cost of housing not out of reach
Dr. Cooper noted that on a national basis, the cost of housing is not out of reach for the typical buyer. “Because of low mortgage rates, the typical homebuyer still spends just over one-third of disposable income on mortgage payments, a share that’s just modestly above long-term norms.”
She added that interest rates won’t stay low forever, and even a moderate two-percentage point increase to more normal levels would put some strain on affordability and slow the market. However, for current owners, moderate rate increases likely won’t severely stress affordability given that about 68 per cent of mortgages have fixed terms – many five years or longer – and most variable-rate holders will likely lock-in when rates begin to climb.
Katie Archdekin, Head of Mortgage Products, BMO Bank of Montreal, warned that even in a low interest rate environment, Canadians should prepare ahead of time financially in case of future increases.
“Regardless of current interest rates, it is important for homeowners or potential buyers to be prudent and stress-test their mortgage against a higher interest rate to ensure they can afford what they signed up for. The rule of thumb is total housing expenses should not consume more than one-third of total household income.” Ms. Archdekin added that Canadians looking to buy a home should consider a maximum amortization of 25 years, which will save homeowners thousands of dollars in interest rates over the life of the mortgage and ensure Canadians can become debt-free faster.
Other national and regional findings include:
- Home ownership in Canada at record highs, climbing about four percentage points in the past decade to around 70 per cent, which is above the current U.S. rate of 66.3 per cent and even above the peak U.S. rate of 69.2 per cent.
- The national housing boom has already cooled, with Canadian home sales up just 4.6 per cent in 2011 and the once red-hot Vancouver market softening. Sales have declined considerably in Vancouver and remain soft across British Columbia.
- Sales remain strong in Alberta and Saskatchewan as a result of healthy rates of immigration from other countries and provinces, as well as solid investment-led economic growth. Alberta is enjoying the fastest private-sector job creation in three decades.
- Demand remains robust in a few major centres outside of these three provinces, notably Toronto, Montreal, Winnipeg, Halifax and Ottawa.