17% correction between mid-2007 and
By Mario Toneguzzi, Calgary Herald
CALGARY — A new report released Tuesday by BMO Capital Markets says the national housing picture in Canada
masks major underlying differences in valuations among three of the country’s
four largest cities — Vancouver, Calgary and Toronto.
The report flags the possibility of lower prices in Vancouver, steadier to softer prices
in Toronto and firmer prices in Calgary in the near future. “In addition,
Canada’s real estate market is vulnerable to a correction if there is a rapid
rise in interest rates due to higher inflation, an increase in unemployment
because of a weak U.S. economy, or a slowing in foreign investment,” said the
Soaring oil prices and rapid in-migration led to a doubling in Calgary’s house prices
within four years, making the city Canada’s housing hot spot five years ago,
said the report authored by senior economist Sal Guatieri.
“But lofty valuations, a pullback in oil and the recession spurred a 17 per cent
correction between mid-2007 and early 2009. Although the market has recovered more
than half of its losses, Calgary is still one of the few Canadian cities —
Edmonton is another — that have yet to reclaim pre-recession peaks,” said the
“However, valuations have improved since 2007, with prices at 4.2 times income, less than
the national norm. Barring a sharp pullback in energy prices, Calgary’s house
prices stand a reasonable chance of growing alongside incomes in coming years.”
Nationwide, average existing house prices have more than doubled in the past 10 years,
hitting new highs in April. Prices are 5.1 times median family income and
housing costs an extra two years of gross income compared to 2001, when the
boom began and valuations were closer to historic norms, said Guatieri.
The report said Vancouver’s house prices have nearly tripled in the past decade as it
rides a wave of wealthy immigrants. Demand from China has been strong, supported by fewer travel restrictions, stricter
purchase rules and high prices in China. The average priced home in Vancouver
is now 11.2 times family income, more than double the ratio of a decade ago.
After running only modestly above Toronto’s prices in the early 2000s,
Vancouver is now 71 per cent higher, said the report.
Guatieri said Vancouver’s lofty valuations imply a market that is priced for perfection and
subject to an elevated risk of a correction. “Four corrections in the past
three decades saw declines averaging 21 per cent. However, if interest rates
stay low and wealthy immigrants continue to pour into the city, prices could
stabilize sooner than in past downturns,” he said.
The BMO report said Greater Toronto house prices have nearly doubled in the past
decade, and now sit at 6.7 times family income, compared with 4.3 times in
2001. This is comparable to valuations reached in the late 1980s, which led to
a 25 per cent reduction in prices. But the key difference now is that mortgage
rates are below four per cent instead of near 14 per cent, which supports
“Given our outlook for a moderate increase in rates in the next two years, prices could
soften or at least stabilize for a while. A possible overhang of condos could
aggravate the weakness. However, continued sturdy immigration, with one-third
of the nation’s immigrants – 92,000 people – settling in the GTA last year, should
help to cushion the blow,” said Guatieri.