Home Prices Approaching Record Highs Compared to Household Income, BMO says

This article appeared on CTV.ca Friday, March 4th, 2011.

The Canadian housing market could be headed for trouble if there is no moderation in prices in the months ahead, the Bank of Montreal says in a new report.

Housing prices are currently about 10 per cent above what they were before the recession, which was already an all-time record.

The bank says housing prices are rising faster than personal incomes, a worrisome trend which is making the market less stable.

Bank of Montreal economist Sal Guatieri says that a nationwide correction is unlikely, but would be possible if the price-to-income trend doesn’t change, or if interest rates spike.

At the moment, the risk is not the same in every housing market in Canada, with some provinces seeing more extreme conditions than others.

The most concerning scenario is in Saskatchewan where the price-to-income ratio is 39 per cent above historic norms, followed by Newfoundland at 34 per cent; British Columbia and Manitoba, with each at 31 per cent; and Quebec at 29 per cent above normal levels.

In Canada’s largest province, Ontario, this same ratio sits only 10 per cent above historic levels, which suggests its housing market may be overvalued, but is not in danger of collapse.

The good news is that the bank expects household incomes to grow faster than housing prices in the future, which would make a major correction unlikely.

The Bank of Montreal says that tougher mortgage rules and higher interest rates should help stabilize housing prices and cool down sales.

The report is the latest warning about rising housing prices and the risks they pose to the Canadian economy. A February report from Capital Economics warned an existing housing bubble was set to burst, a potential collapse that could be triggered by rising interest rates. The economics consulting firm predicted that housing prices could fall 25-35 per cent over the next three years as interest rates increase.