“The Bank of Montreal poured cold water on the idea Canada’s housing market could be headed for a crash, suggesting that prices are only “moderately high across the country.”
“Expect the housing boom to cool rather than crash,” BMO’s chief economist Sherry Cooper and senior economist Sal Guatieri said in a report published Monday.
“While the housing boom is unlikely to continue unless mortgage rates drop much further, neither is it likely to bust.”
The bank says home values are indeed rising at a faster pace than they used to, but the signs are pointing to a soft landing where prices stabilize — not a hard correction where prices drop quickly by 20 per cent or more.
“In our view, the national housing market is more like a balloon than a bubble,” the bank said. “While bubbles always burst, a balloon often deflates slowly in the absence of a pin.” …
Average prices have grown more than twice as fast as family incomes since 2001, but BMO’s report argues there’s no reason to panic yet.
Nationally, home prices are 4.9 times higher than the average household income. A decade ago, that ratio was at 3.2.
Some cities are hotter than others. Vancouver’s ratio currently sits at 10 times higher than average household income, Toronto’s is at 6.7, Montreal’s is at 4.5 while Halifax is at 3.8. Those are all on the high side, but if the market cools, that will allow incomes to catch up and move the price-to-income ratio lower, the bank argues.” …
The bank does note, however, three risks to the outlook. A sudden hike in interest rates, a widespread Canadian recession, or an economic slowdown in Asia reducing the number of foreign buyers would all take the air out of Canada’s housing market.
“But barring one of these triggers, however, a dramatic correction is unlikely,” the bank said.
– from ‘No housing crash coming in Canada, BMO says’, CBC, 30 Jan 2012
[hat-tips to Zerodown, HD, Potato, Don]
BMO report itself here: BMO 30 Jan 2012 pdf
What’s the difference between a balloon and a bubble?
It seems, from this report’s perspective, the only real difference is HOPE.
Hope that the bag of gas with a membranous cover will deflate slowly rather than implode. Otherwise, a balloon pretty much is a bubble. Both are, after all, largely made up of air.
We’d love to see the BMO math on the proposed ‘income catch up’. It simply isn’t going to happen. There is no way of price:income reconciliation other than via a dislocation, and, unlike BMO, we don’t think there is any need for a precipitating factor to start the implosion.
“There’s no reason to panic yet.”
Of course, by the time BMO warns you to panic, it’ll be obvious to everybody that it has indeed been a classic bubble.
This is all rear-view commentary, with a hefty dose of aforementioned hope. Pretty much useless to anybody attempting to make decisions concerning their own financial future.
Has anybody done an analysis of the predictive capacity of BMO Special reports over the last 12 years?