Tuesday, February 21, 2012
There is a soft landing in sight for the Canadian housing market, according to BMO economics.
Compared to the recent rash of concerns raised by various groups about an overvalued Canadian housing market coast-to-coast, BMO is bucking the trend, suggesting that such reports either miss the market in their simplicity, or are not entirely true.
“Like any issue that is as broad and complex as housing, an analysis of both the pros and cons can provide valuable perspective. In our view, the housing boom will more likely cool than correct, even in condo-driven Toronto—the target of many scary headlines.”
They do believe that the housing market will experience a slowdown; contrary to many of the alarmist news, BMO feels that, “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.”
Unlike interest rates drop further, they don’t expect the boom to continue- but neither do they expect the floor to fall out from under the market either. With the continuation of low interest rates, levels of affordability continue as well.
The whole concept of the housing bubble bursting centres in the relationship between somewhat stagnant incomes in this country, juxtaposed with levels of household debt ramping up, as well as property values escalating at a fairly quick place.
The only region that they do concede is in a dangerous position is Vancouver, where property values continue to skyrocket, as Asian investors continue to grab up properties.
BMO responds to concerns about an oversupply in the condo market in centres like Toronto, but suggest that these concerns are not totally founded in fact either, mostly because of a low vacancy rate coupled with a rising demand for rental accommodation for an influx of immigrants to the centre.
“Although the cost of owning a new Toronto condo exceeds the rental income derived from the unit, expected steadier price growth ahead should allow rents to eventually catch up, reducing concerns that investors will dump their units. In Toronto, the condo market has effectively supplanted the rental market due to a lack of new apartment buildings and low rental vacancy rates.”
Furthermore, thanks to low interest rates, home ownership remains within reach for the bulk of Canadians, in most centres- and is expected to continue to stay that way as well. BMO is not without its warnings though, suggesting that there could be a material shock in the wings, especially in the event of an interest rate hike.