No sign of housing market bubble
Bruce Constantineau
Sun
Fragile housing market bubbles have not emerged anywhere in Canada yet but Vancouver remains most vulnerable to a boom-bust phenomenon, according to a BMO Financial Group report.
The report said the city’s high house prices make the market susceptible to collapse if prices keep rising quickly over the next two years — a time when mortgage rates are expected to increase by two percentage points. That could push affordability to dangerously low levels.
“Right now, there’s no evidence of bubble conditions,” BMO Financial Group assistant chief economist Paul Ferley said in an interview. “But if we had to highlight which market is at greatest risk, it would have to be Vancouver.”
He said a two-percentage-point increase in five-year mortgage rates, expected by April 2007, should moderate future price increases in all Canadian markets because monthly mortgage payments would become significantly higher.
“The real test comes when we see what happens with house prices after we move into a rising interest-rate environment,” Ferley said. “If there’s no moderation in price increases, then there’s cause for concern.”
The Real Estate Board of Greater Vancouver says the benchmark price of a single-family home in Greater Vancouver has increased by about 12 per cent in the past year to $540,000.
The BMO report said Vancouver homeowners pay by far the highest percentage of their income to cover monthly mortgage payments — 70.2 per cent of average labour income in the city, compared with 52.8 per cent in Toronto and a national average of 40.6 per cent.
The Vancouver rate remains below its historical average of 74.9 per cent but the rate gets pushed up to 78.5 per cent when mortgage rates peak in about two years.
“Even at that level, it’s still not as high as we saw during the earlier housing boom [in the late 1980s],” Ferley said. “But it shows more of a deterioration in affordability than we see in any other market.”
He said a surging Vancouver housing market in the late 1980s caused mortgage payments to rise to more than 90 per cent of the average labour income in the city — a rate that was not sustainable.
“There was a real deterioration in affordability back then yet housing prices continued to rise, which indicated that speculation buying was at play,” Ferley said. “In our view, house price increases now don’t reflect a lot of speculative activity. They’re going up because mortgage rates are fairly low and housing remains affordable.”
He said a major increase in mortgage rates, like five percentage points, would clearly damage housing affordability all across Canada but stressed there’s little chance of that happening because inflation rates in the country remain low.
