Canada's Housing Bubble

Nov 12, 2010 Fiona Anderson communities.canada.com

The talk of a housing bubble, is still rampant, especially in B.C. but now BMO Capital Markets Economics says the Canadian housing market is not in a bubble. Oh, except if you live in B.C. and then maybe it is.

Market valuation is only "moderately" above long-term trends, BMO says.

"A comparison of the ratio of prices to incomes with the long-term trend suggests Canadian house prices were overvalued by as much as 18 per cent in late 2009," wrote BMO Economists Earl Sweet and Sal Guatieri. "However, a 3 per cent decline in seasonally-adjusted prices so far this year, coupled with continued moderate income growth, has reduced overvaluation in the third quarter of 2010."

"All things considered, the Canadian housing market does not appear to be in a bubble, and is unlikely to suffer a U.S.-style collapse," the economists wrote.

But prices in B.C. haven't been declining as they have in other provinces  and the price-to-income ratio is 17% above the trend line.

"The price-to-income ratio has trended up since the early 1980s reflecting the influence of pricey Vancouver, where a limited amount of space has put upward pressure on land prices, and where wealthy foreigners are supporting the market," BMO wrote. "Unlike in other provinces, B.C. house prices have continued to trend higher in 2010, reaching new peaks in September.

And that means BC faces a greater downside risk than other provinces.

Read the full report here.