Canada’s housing market more like a balloon than a bubble: report
Concerned about a big drop in home prices? Quit worrying.
Canada’s housing market is more like a balloon than a bubble, maintains BMO Capital Markets in a recent report.
While bubbles always burst, a balloon often deflates slowly in the absence of a “pin”.
In most regions then, 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.
What would constitute a balloon-bursting pin? If interest rates were to spike by about four percentage points, for instance, the affordability of homes would quickly drop. Same with a severe recession.
But the chance of either of those events happening is unlikely, the report says, given an outlook for restrained economic growth and low inflation in the advanced economies.
Too much easy credit? Nope. Although growing debts are a concern, BMO doesn't feel that most households are even close to an American-style “debt wall”, or that they will run into one when rates climb.
That said, Canada’s ratio of household debt to disposable income has risen by 40% in the past decade. And the ratio of house prices to income is now 30% above its historical average.
But that's still manageable. Two-thirds of mortgages in Canada are fixed term, the report says, which means most homeowners with variable rates will be able to lock in well before rates start to climb.
"Except for a few remaining hot spots, the national housing boom has already cooled. Sales and price growth has moderated this year, and there are few signs of market imbalances or overbuilding," BMO observes.
Could the balloon get bigger as long money stays cheap? Or do you expect a fully fledged bubble after all?
By Gordon Powers, MSN Money