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October 10, 2014 12:57 ET

BMO Economics Housing Report: The Housing Boom-And Then There Were Three

Report shows deep gulf between the boom-time conditions in Calgary, Toronto and Vancouver, and the lacklustre activity almost everywhere else

TORONTO, ONTARIO--(Marketwired - Oct. 10, 2014) - While housing markets across the country have largely simmered down, that's not so in Calgary, Toronto and Vancouver where prices are rising sharply, according to a new report from BMO Economics.

The report shows that strong demand and lean listings in the 'Hot-3' markets have sent prices soaring, while most other regions have cooled. Prices are flat in Montreal and Ottawa, and falling in Saguenay and Saint John. A few western cities have also caught a chill, including Regina (where prices have dropped -2.4 per cent year-over-year) and Victoria (-9 per cent since 2010).

According to Sal Guatieri, Senior Economist, BMO Capital Markets, reasons behind the nationwide cool-down are clear.

"The housing boom that began early last decade effectively ended with the 2008 recession and several turns of the mortgage-access screws," noted Mr. Guatieri. "Despite reasonable valuations, most regions won't regain their former pep, as interest rates are likely to climb next year."

However, more puzzling are the rapid price gains in Calgary and Toronto, and the quick recovery in Vancouver. The report notes five factors driving activity in the three cities:

  • Strong population growth: The combined population of the Hot-3 has risen twice as fast as other regions for the past decade – a cumulative 23 per cent vs 11 per cent

  • The youth movement: When baby boomers flocked to Toronto in the late 1980s, sales and prices bolted skyward. Today, their older children are one of the fastest growing age groups. The prime home-buying cohort of 30-to-39 year olds is outpacing the general population (1.8 per cent vs 1.1 per cent)

  • Solid job growth is a mainstay: While Calgary's blistering pace has moderated due to lower energy prices, it's still running faster than 2 per cent y/y, and Vancouver's rate has sped up to above 3 per cent. Toronto's employment weakened recently, but only after growing 2 per cent in the spring and 4 per cent last year. Elsewhere, job growth is running at a more pedestrian 1.1 per cent pace.

  • Record low mortgage rates: The typical family in Vancouver would need to spend a whopping 62 per cent of income on mortgage payments to buy a bungalow, and this jumps to 75 per cent if rates were 2 percentage points higher. In Toronto, it would take 42 per cent of income currently, moving up to 50 per cent if rates were to rise 2 percentage points. While Calgary is still affordable, with mortgage costs on a benchmark home requiring 23 per cent of income, this won't last if prices continue to leapfrog income.

  • Foreign wealth: Anecdotes from builders and realtors suggest foreign wealth is a significant factor in a number of high-end neighborhoods in Vancouver and, to a lesser extent, Toronto.

The report also states that worsening affordability means that all three of these markets will cool when borrowing costs eventually increase. "Pricey Vancouver and Toronto are likely to face moderate price declines, while still-affordable Calgary could get off more lightly," noted Mr. Guatieri.

Mr. Guatieri said that raising borrowing costs or restricting mortgage access would act to cool these three hot markets, but such actions would also risk freezing demand in other parts of the country where the boom ended years ago.

Laura Parsons, Mortgage Expert, BMO Bank of Montreal, notes that especially as conditions change, it's important Canadians stress-test their mortgage and housing costs against a higher interest rate.

"Gauging the stability of your mortgage by stress testing it against a higher interest rate is key to making a responsible and informed home buying decision," said Laura Parsons, Mortgage Expert, BMO Bank of Montreal. "Many mortgage holders and potential buyers, especially in larger cities, need to evaluate different circumstances, and the likelihood of being able to afford their purchase long term."

Ms. Parsons added that those looking to buy in today's market should consider speaking with a mortgage specialist who can help them establish a plan to ensure long term affordability.

The full report can be downloaded at bmocm.com/economics.

About BMO Financial Group

Established in 1817 as Bank of Montreal, BMO Financial Group is a highly diversified financial services organization based in North America. The bank offers a broad range of retail banking, wealth management and investment banking products and services to more than 12 million customers. BMO Financial Group had more than $586 billion in total assets and approximately 47,000 employees at July 31, 2014.

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