Competing views of the Canadian housing market portray it as either an overvalued bubble about to burst or only slightly overheated but having basically sound economic basis. Which in turn sees the market likely to cool gently.
Mortgage costs, not just house prices, are one of the main deciding factors for potential home buyers. This makes comparison of monthly payments to incomes and rents more relevant than similar comparisons using house prices alone. Slowly rising mortgage rates and a moderate slowing in housing starts will gradually cool the housing market. But ongoing employment and population growth will continue to support housing demand.
Assessments that point to a housing bubble typically rely on two main factors: The ratio of housing prices to apartment rents, and the ratio of incomes to housing prices. By both these measures, many markets in Canada do seem overvalued at first glance. However, this ratio doesn’t account for low mortgage rates.
Low interest rates since early 2009 have softened the impact of rising house prices, keeping the relationship of carrying costs to incomes and rents well within historical norms.
The Bank of Canada’s affordability index has stayed virtually unchanged since the 2009 recession, and is actually slightly below its pre-recession level.
Mortgage rates are expected to rise over 2014, but not sharply, given Canada’s relatively slow economic recovery. This suggests that a slowly cooling housing market – a “soft landing,” rather than a “bubble popping” – lies ahead. It will take until 2017 or 2018 for mortgage interest rates to rise by about two percentage points.
The current view is that more prudent mortgage underwriting in Canada than in the United States, headlined by the very small number of subprime loans here historically, has prevented the stockpiling of high-risk mortgages by lenders. Over the past two years, the proportion of mortgages in arrears has generally fallen across Canada. A relatively low proportion of arrears is likely to persist, since national employment is growing – though slowly – and interest rates are not forecast to spike.
If there were a downturn centered on markets in Ontario and Quebec, national resale prices would be expected to decline slightly. But none of Canada’s six largest cities appears significantly overbuilt by past standards. In general, housing starts are in line with demographic requirements. Nationally, and for each of six metropolitan areas (Toronto, Ottawa, Montreal, Calgary, Edmonton, Vancouver), the data shows no obvious overbuilding, although Toronto is an important borderline case.
In short, steady employment and population growth will help offset the effects of interest rate increases, maintaining manageable housing demand. Thus, a soft landing for the Canadian housing market appears to be the most likely scenario.