Activity in the housing market is becoming further detached from fundamentals, two new reports show, reinforcing fears among some housing experts that Canada’s real-estate market has entered a bubble.
New York-based Bloomberg, the global news and data firm, last week ranked Canada as one of the bubbliest housing markets on the planet, while closer to home, a former Bank of Canada economist published research that suggests housing in Toronto and Ottawa is overvalued based on historical metrics, while Montreal is becoming increasingly so.
The heat in those eastern cities, combined with Vancouver’s chronically elevated prices, is making the national numbers frothy, as conditions in Calgary, Edmonton, and Winnipeg look reasonable, according to Alberta Central chief economist Charles St-Arnaud’s analysis. But since those places are home to 50 per cent of Canada’s population, the Bank of Canada will be forced to raise interest rates extremely carefully because low borrowing costs are the only reason housing is affordable, St-Arnaud said.
“The housing market will probably be the first casualty of higher rates,” St-Arnaud, who previously worked at the Bank of Canada and for Morgan Stanley and Nomura Holdings Inc. in London, said. “When rates go up, that affordability will disappear very, very quickly.”
Bloomberg’s “Bubble Ranking” generates country scores by considering what it costs to buy a home compared with renting; the price-to-income ratio; inflation-adjusted price growth; nominal price growth; and the annual rate of household credit growth. New Zealand sits on top of the list, posting the highest marks in four of the five categories. Canada is second, followed by Sweden, Norway, and the United Kingdom, respectively.
New Source: Financial Post