Why many fear a ‘deep correction’ in Canada’s housing market
The Globe and Mail
Published Wednesday, Jun. 24, 2015
Bank of Montreal’s chief economist believes the angst over the real estate market is linked to a persistent gap between U.S. and Canadian house prices.
Douglas Porter tracked the two markets, finding that prices in both countries climbed about 5 per cent over the past year.
“This unusual period of symmetry follows a wild 10-year period which saw the U.S. market boom, then collapse, then finally recover strongly for a spell,” the BMO economist said in a research note.
In contrast, but for the “wild swing” during and quickly following the financial crisis, Canadian home prices have been “chugging along,” he found.
“What makes this recent period of relative calm between the two national markets so notable is that Canadian prices took about a 60-per-cent step ahead of U.S. prices in a six-year span from 2006-2012,” Mr. Porter said, noting that prices “largely tracked each other” until 2006, as the chart above shows. .
“Then, after a moderate step back, they have largely stayed there, far above their U.S. counterparts,” he added.
“It’s this gap that - to this day - has so many calling for a deep correction in Canada.”
While many observers have issued warnings about Canada’s housing market, Bay Street economists don’t see a meltdown coming, though some predict a natural cooling.
Nor does the Bank of Canada, though it is keeping a wary eye on prices, believing them to be inflated by between 10 and 30 per cent.
Much of the angst, of course, has to do with the booming Toronto and Vancouver markets.
“Strong demand from international migrants and young millennials, an influx of foreign wealth, and low mortgage rates are driving the two markets,” Mr. Porter’s colleague at BMO, senior economist Sal Guatieri, said just this week in a separate economic forecast, citing a price surge in single-family abodes in those cities.
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