The Canadian housing market could be headed for trouble if there is no moderation in prices in the months ahead, the Bank of Montreal says in a new report.
Housing prices are currently about 10 per cent above what they were before the recession, which was already an all-time record.
The bank says housing prices are rising faster than personal incomes, a worrisome trend which is making the market less stable.
Bank of Montreal economist Sal Guatieri says that a nationwide correction is unlikely, but would be possible if the price-to-income trend doesn't change, or if interest rates spike.
At the moment, the risk is not the same in every housing market in Canada, with some provinces seeing more extreme conditions than others.
The most concerning scenario is in Saskatchewan where the price-to-income ratio is 39 per cent above historic norms, followed by Newfoundland at 34 per cent; British Columbia and Manitoba, with each at 31 per cent; and Quebec at 29 per cent above normal levels.
In Canada's largest province, Ontario, this same ratio sits only 10 per cent above historic levels, which suggests its housing market may be overvalued, but is not in danger of collapse.
The good news is that the bank expects household incomes to grow faster than housing prices in the future, which would make a major correction unlikely.
The Bank of Montreal says that tougher mortgage rules and higher interest rates should help stabilize housing prices and cool down sales.
The report is the latest warning about rising housing prices and the risks they pose to the Canadian economy.
A February report from Capital Economics warned an existing housing bubble was set to burst, a potential collapse that could be triggered by rising interest rates. The economics consulting firm predicted that housing prices could fall 25-35 per cent over the next three years as interest rates increase.
Comments for this story
Echo
Here we go again. Goodbye hope for the future, hello bankruptcy!
Gareth Hitchings
Canada didn't weather the recession better than other countries, it just postponed the recession - using borrowed money. Consequently household debts, mortgage debts and government debts are all hitting all-time highs right now, just as interest rates start going up. It's quite the pickle we've got ourselves into and the only road out of it is going to be a hard reckoning, just like our neighbour.
Don in Edmonton
Perhaps the previous two responders should have read the last sentence of this report!
Stewie
This is why the conservatives want an election so badly because once the bubble pops it will reveal Harper's poor management with his zero down mortgages. It gave the appearance of an economic recovery but the end result of this stupidity will cause great pain for many. The bankruptcies rate is still 22.4% higher than pre-recession levels. We coasted through the recession because of liberal policies, Harper has added over 100 billion to our national debit, thanks to Harper we pay an additional 16 million per day in interest. opposition parties agreed to 13 billion in stimulus spending, Harper created this massive debit all by himself & shows no signs of slowing spending. He promised a smaller governmet, he increase it by 12%. We need to vote the neocons out before they bankrupt our country.
Mr. Coffee
Wake up and smell the coffee! I should work at BMO and get paid lots of money! As an Average Joe with no Business degree, I have know we have been in a housing bubble for two years. POP!
Peter in Niagara
They have been talking about this for years, "a bubble burst is coming", Canadians are over leveraged". We are definitly in new territory. The last two recessions were brutal, with double digit interest rates setting off the housing collapses.
Michael
They've been saying the sky is falling for too long. Stop it, nobody believes it.
JB in Ontario
Buyinfg a house, even a small house is out of reach for many Canadians. The housing market is way out of wack. The average price of a home in Toronto approaching a half million dollars, the rich keeping getting richer and the poor, poorer. We are becoming like Mexico.
Dayton
Seems the Banks are trying to stifle the price of housing so they can raise interest rates to their advantage. The last thing they want is to own real estate. Knowing the low interest rates have encouraged more to buy they see it's time to cash in. The more they make the more they can lend. Encouraging us to save is another avenue. They can't lend when they don't have the resources. Those of us who have redirected pitiful savings into real estate are not in their best interests.
Paul, Richmond BC
Interest rate hikes, new mortgage rules and other traditional measures cannot moderate house prices when, at least in the Vancouver area, they are being driven ever higher by speculation from China. We are being swamped by the huge disposable incomes from outside the Canadian Governments sphere of influence. What we need are new measures to promote afford-ability for residents whose income is earned locally.
Tim
The real problem is that people overbought when they shouldn’t have. Young couples want the brand new $500,000 plus house with two new cars in the garage right away instead of buying a smaller house or apartment and building up their equity like I and others my age first did. Instead they go heavily into debt as soon as they can and then cry afterwards about the amount they own.
Elias Nasrallah
Don't forget the banks are feeding us this information. They are the ones who start the panic.......
Steve T
Interest rates need to be raised, to reward those people who manage their debt prudently, and don't overspend on every little luxury. Right now, interest rates encourage debt and discourage savings.Yes, there are some people who are frugal and still barely making ends meet and would be hurt by an interest rate increase. There should be programs to help them. However, a lot of people seem to believe they have a birthright to a 2000 sqft house in the suburbs, with two cars, and fancy holidays every year, even if they only make $50k. Guess what, most of our parents managed to be happy in 1200 sq ft bungalows, sharing a single vehicle, with a camping trip constituting the family vacation. If people nowadays kept their spending in check, we wouldn't be so nervous about raising interest rates by a few points.
Darren
Since the big crash, these so called experts have been saying that The housing cannot handle this, they say the market will crash, and we just keep going. Who are these people working for? Where are they getting their Data from? do they know we are Canadian and will keep going no matter what?Maybe they are trying to make an imaginary bubble burst by getting investors scared and get another crash. Maybe there is a conspiracy that these so called experts have against the Canadian people. This to me sounds like economic terroristic tactics. Ok this is just my verbal diarrhea, but if you think it could be true!!!
Financial advisor
Housing prices have been in bubble zone for 4 years now. The fact they are now saying it only means its time to sell your overvalued house and wait to buy something much cheaper in 6 months.
Dan from Northern Ont
The problem is that property, like oil is treated as a commodity. People will buy and sell it to turn a profit, which leads to inflated prices, and the proverbial bubble.The government could tax the profits heavily to discourage this, but how do you account for special circumstances, and in turn loopholes?
Marty
My wife and I, as a relatively younger couple, are still currently renting. We intend to buy within a 12 to 16 month time frame. It is apparent that houses can be very expensive. After a vehicle payment, daycare (she works there I'm happy to inform), etc... paying a mortgage for us will almost be like "living on the edge" of our financial means. Having said that, we need a place to call home and that's why we intend to buy. From our position, I hope the housing market crashes and prices drop. I know that all of you home owners with future thoughts of selling can't wish for the same.
Worker Bee
I can't speak for all markets but in Alberta the housing prices are nowhere near as high as they were in 2008, and in some places they are half. I'm not sure if BMO knows that Alberta is part of Canada?
redbeardbob
Here's a great idea, how about strictly controlling overseas buying of residential housing as an investment, the chinese are notorious for buying and flipping especially out in Vancouver, as a way of laundering ill gotten gains. Get the government to step in and regulate that market and you will see a moderation of the prices and make it affordable for a regular family to buy a house in the lower mainland.
James in Ottawa
Great, now I can get a house for cheap in Ottawa, keep those prices falling!!
Paul
I see it here everyday, the housing prices jumped 100% and higher in my city since the boom started.People buying houses for 300,000 that are worth 150,000 in a normal market.When the boom dies and all the folks that have homes that are worth half or less then the price of the mortage that thier paying off, its gonna be ruff for alot of people with intrest rates going up.
islander
That's odd. In Nanaimo prices continue to drop and same with the Gulf Islands. Major centres like Victoria and Vancouver prices are way too high. Depends on where you are. Isn't across the board by any means.
Doriansgrey
The economic tsunami has yet to appear. You can't spend your way out of debt! This was a big mistake on the part of governments globally. Get ready for a very dismal future!
Bob
@Stewie. Regardless of whether you are a lib or a con, at least get your facts straight. The Harper government has brought an end to some $0 down mortgages. The mortgages that were not affected by this change (i.e. personal residences) have never had any restrictions - whether under the libs or cons. However, even with these mortgages, the Harper government has encouraged fiscal restraint by preventing people from taking on 40 year or now 35 year mortgages.As for the amount added to the national debt. When Harper announced the spending the libs, ndp and bloc complained about it--too slow to roll out, not enough, blah, blah, b;ah. Now that the moment is over, these parties are acting opportunistically to claim that the government overspent and cannot be trusted. This is the typical work of liberals--lie to the public to ensure you get power.If you think big government and a welfare state are great--fine, vote liberal. If you like your freedom and believe in civil society--vote conservation. But be honest and don't make facts up when you submit comments. It's stupidity and "spin" like yours that cause us to lose faith in our politicians and undermines our ability to engage in rationale conversations over disputed policies.
Richard
I will argue that you can't say that about the nation that we share the degree of appreciation or value of property from one town to town or city to city or farm to farm from one province to another. This drives me nuts.Guess what, this is the spring market and people are off the fences buying again because our recession is over (which a lot of people have been on the fence for the past oh 2.5 years). So, what do you think is going to happen? Don't supersensationalize the whole thing. The buyer has the ultimate say in a market and when there are less buyers the prices will come down. No need for ANY government intervention. Keep the hands off please.
Kim in Calgary
The problem is not with the housing prices but rather the lack of common sense that ALL of the financial institutions have exhibited when lending to those with only 5% down and extended amortizations out to 40 years (now reduced). Also most young people today require a big home rather than starting small and building up some equity. What a shame that they were raised with a spoon stuck in their mouths.
Ryan
The housing prices have very little to do with Canadian buyers. It has to do with Asian buyers. They are purchasing condos in Vancouver and Toronto from sales centres in China -- and flipping them before or right when they go on the market to other Asian buyers. They are playing russian roulette with our markets and laughing. Even the Chinese government caught on -- and now they are moving more of their money out to foreign investment housing markets. Canada being the easiest to invest in assures they can move their money freely. Really, Canada and Canadians need to wake up and watch what other rich countries are doing (Australia for example) to curb this type of investment.
Pierre in Ottawa
Current home owners may hate me for saying this...I hope there is a bubble and it does burst.It is the only hope i have of ever being able to afford a house.
Claude
What a crock of .... If the banks say it often enough it will finally happen and they will own all the houses people will not be able to afford. They said the same thing last year. They got the Government to raise the the requirement to buy to 20% down payment and now they will strike fear in people causing a crash.. If I lose my house it will be back to paying the rich for rent again. CONS = MAKING RICH RICHER... What a life..
Brian
This bubble has burst in some areas (Spain for example) with some houses on the market for over 4 years and no sale in sight. People are dumpint them just to get out from under the mortgage and the prices have fallen over 50% in the last two years. With a glut of new housing started before the economic collapse they are reeling in the real estate business there with over 1 million new builds in varying stages of construction, and NO BUYERS! Yes, it is unlikely that we are headed in that direction because we can see it coming and can step in and regulate it, but let's be realistic. Who can afford a house in the 500's as a STARTER?The market will only go as far as people are willing to spend, so stop spending like it's going out of style and the market should self regulate to a normal? level!An 1800 square foot home in Spain for about 130,00 dollars? Who wouldn't want to live on the Mediterranean?Adios, muchachos!
pumper0001
No negative comments please.
Lets keep on pumping our real estate prices up and our superior banking system not to forget our millitary can fight off any alien race in the universe.
I want to see a 200 debt ratio.
And great retirement and benefit packages.
Let the young one pay to support the boomers.
Rosie
Consumers who own homes need the value of their homes to increase so they can use their line of credit to buy stuff.The banks encourage this behaviour but are now telling us to be careful ,the market bubble could burst.This would not be good for anyone. A correction in people's lifestyle is needed more than a correction in the value of their homes.
Davis
Good! Let the blood feast begin so I can grab up one of those over-priced abodes at a fraction of the cost. In other words "homeowners" what it's "really" worth..without your "champagne price stamp" on it. After all most of them all look like show-rooms from Home Depot but underneath the shiny brass is a "Made in China Cheap" label stamped on it. You fool no one. Your Ivory Tower smells like China plastic.
Adrian from Hamilton
After 9/11 the US lowered interest rates to almost zero. Americans bought MacMansions they could not otherwise afford. 5 years later they could not afford to renew their mortgages and the US housing market collapsed. Canada missed out back in 2002 but are doing so now. The 5 year fixed rate mortgage provide a buffer for current owners. Rising interest rates won't affect them now, just new buyers. In 2015 when the current 5 year mortgages are up for renewal is when the Canadian housing bubble will burst.
Richard
I am interested to know if the Bank of Montreal would be held legally responsible for their comments on such things.
mimimin
The house price at the moment wasn't right and reasonable. But I'm not sure about bubble bust will hit strongly. May be a few will suffered, the majority of the properties were under management by cash down payment. In my home country, people bought whatever without mortgage. They didn't have interest charging burden like we have here. The best way to manage your mortgage is know your limits.
JEAN-GUY
Sorry but thats what happens when you let the fox take care of the chicken. Goverment should remove the self regulating industries. And start enforcing laws that prevent,real estate,construction,and the rest of home industry regulate the prices. If the goverment controlled prices we would be better off.
Greg
I hate to say it but we need the housing bubble to burst. Homes are so over valued and people are paying way too much for real estate. Houses are at least 30% over valued and I refuse to buy a house until the bubble bursts.
Chat
Good to know that Ontario is not in bubble territory.
Doug
If developers and their politician friends are no longer going to be able to sell as many high priced, high density homes to as many new taxpayers . . . that's a good thing! If home flippers are going to have to quit flipping and get a real job . . . also good!And best of all, if young people are now going to be able to buy a home without taking out a ridiculous $250,000 mortgage . . . good for them.
chel in the Peg
@ Davis - Indeed. Most homes built within the past 25 years have not aged well. Unless you can afford to build a custom designed home, you're better off buying an older home for less money and renovating with quality materials when you can afford to do so. Even if I were interested in a newly built home I'd be SOL because no one seems to build anything less than 1800 square feet. I'll take my 1100 square foot 1946 salt-box house, thanks very much.
Norman
I don't think it is a bubble even if the prices went up..If you can see the real value of the dollar you will realize that actually the houses are worth less...a house that costs 500.000.00 but now with that money you can buy half of things than before..money is getting worthless, go to the bank to deposit it and you will realize that , (o interest).
Art
Ontario is not in bubble territory because they have a good liberal government. The BC liberals are a conservative government but it's federal policies that caused this mess.
melanie
10% appreciation in housing values over 2-3 years isn't that great, actually.
Dave (toronto)
I really hope the housing "bubble" bursts!!! It's about the only way young professionals can afford to purchase a home these days. It seems too many homeowners are watching property brothers and "flipping" shows and are inspired to make a quick easy cash. Biggest pet peeve is with developers and homeowners (large majority of which are retirement age baby boomers) who are instituting bidding wars when selling their homes to inflate their homes in order to have their "dream retirement" while clinging on to their jobs waiting for their "ideal" retirement package. Meanwhile, my generation (in my 30s) will be paying through the roof for their "senior care" as those baby boomers have such a large population. Many comments blaming young couples overspending needs to realize that our generation has a LOT more commodities, more expensive necessities and prices (food, bills, gas, housing & etc.) that are disproportionate to current salaries/wages compared to that of the baby boom generation. You would be shocked to see the ratio of the average income vs home prices in the 70s - 80s compare to the ratio of income vs home prices today. The buble isn't bursting soon enough for me!
Craig from NS
Well if the bubble bursts, hopefully I'll be able to walk in and pick a nice home up for cheap. The cost of homes is ridiculous and they are still building $350,000 homes in our area. Who the hell can afford them? I'm in a single income household, don't have a lot of the amenities and do pretty well. We could use a little more room with two small children. I cannot afford a $250,000 home, much less buy one of the new ones they are building. Even the older homes are too much for what they are worth.I have a friend who just got out of real estate and I have several family members who own a real estate franchise. They may be doing fairly well as everyone is in the family, but there are a lot of empty homes around here. There is a brand new one down the road from here that was built less than five years ago. It has basically been abandoned and anyone can walk in the back (non-existent) door. They stupidly built it near the off ramp of a major highway.
Peterborough J.
It is not so much that interest rates will rise somewhat and make the monthly payments higher - what the problem is, is your heat, your ridiculous out of control hydro, your home insurance, MPAC assessments and your property tax bill, the manipulated gas prices and now the 600,000 new job creator known as the HST on everything. There will be no money left to pay the mortgage - that will bring home prices down.
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