BMO Canadain Housing Outlook 2011
BMO's conclusion is that the broad Canadian market is moderately overvalued. They argue that as incomes rise and prices stabilize, this overvaluation will subside to a reasonable level without any correction in home prices.
Unfortunately, they see the Vancouver market as much more overvalued, with a 20% year-over-year increase to January 31st having been partially fuelled by foreign investment (which you all already know). They say that prices may soften this year in Vancouver, but correctly identify that "overvaluation" based on price to income ratios can be structural and persist for long periods of time, as long as the conditions persist (i.e. foreign investment continues). Importantly for all of you, there is no prediction of a significant correction in Vancouver home prices, as long as the Bank of Canada correctly navigates the tightening of monetary stimulus over the next year.
BMO's view is well-founded: housing markets are local and each has particular conditions that can drive over/under valuation when one is simply looking at housing prices relative to income levels. Vancouver is a destination for foreign investment, as is Sidney, Hong Kong, and San Francisco, because they are recognized internationally as desirable places to live. What the average Vancouverite earns is unrelated to this source of demand. It is true that the removal of foreign demand during periods of global recession can make price corrections more painful in Vancouver (see 2008), as this coincides with lower demand from locals, but another global recession is not being forecast in the near-term.
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