In most of Canada, housing’s not out of reach

With contradictory things being reported about the existence of a housing bubble in this country, it must be frustrating for many to understand what’s actually happening. A new report from economist Sal Guatieri at BMO Capital Markets, should help. His basic message: there really isn’t any national housing bubble, although there may well be unhealthy priceyness in three cities: Vancouver, Victoria and Toronto.

The remaining three-quarters of the Canadian housing market is still at levels that are not only affordable, but that would remain so even in the very unlikely event of a two-percentage-point spike in mortgage interest rates. And even this is merely a theoretical scenario: “It’s very difficult to see interest rates going up that much” any time soon, Guatieri said Friday.

In the rest of Canada, including Montreal, Ottawa, Calgary and Halifax, to take several examples, the cost of carrying a typical mortgage, along with related costs like

The relative affordability of Canadian housing isn’t because prices are modest by historical standards.

property tax, insurance and utilities, doesn’t come anywhere close to Guatieri’s chosen yardstick of affordability — the new, restrictive federal guideline that says insured mortgages cannot be provided to any buyer for whom these costs take up more than 39 per cent of family income.

Using median incomes and typical home prices, Guatieri found that, in Montreal, financing a home would take just 23 per cent of family income and still less in Ottawa, 19 per cent (incomes are higher there). The financial burden in Calgary would be 22 per cent and in Halifax, only 18 per cent.

And if interest rates were to shoot up by two percentage points? Buyers in all of these cities would still be onside by comfortable margins. Among them, Montrealers would pay the highest proportion of income, but it would still be manageable at 28 per cent.

It’s important to note something, though. The relative affordability of Canadian housing isn’t because prices are modest by historical standards. They aren’t. If it weren’t for today’s low interest rates, housing would be significantly harder for Canadians to afford, even it they were still able to qualify under federal guidelines.

Guatieri estimates that, as a national average, home prices are probably 10 per cent higher than fair value, which he defines by looking at the long-term ratio of home prices to personal incomes. This excess should be worked down within the next few years.

(By comparison, the peak of the U.S. housing bubble saw home prices south of the border average 28 per cent above that country’s measure of fair value, which rather deflates the more overwrought media commentaries suggesting a direct parallel between Canada and the U.S.)

On the other hand, if you shift your focus from the national market to Vancouver or, to a lesser extent Toronto or Victoria, it’s easy to see that parts of the housing market may have overheated to a significant degree. Even here, though, it’s not clear that this is a speculative bubble. Take the Vancouver market, where an average single-family home is so stunningly expensive — just over $900,000 — that Guatieri notes a middle-income family couldn’t buy it even if the interest rate were zero. Condos are still affordable under federal guidelines, but barely. Toronto is much cheaper, but its single family homes, with a median price of nearly $520,000, still aren’t affordable for a typical family. Condos remain easily affordable, however.

There’s no guarantee that anything will deflate prices very much even in Canada’s costliest cities, Guatieri points out. The phenomenon of very expensive housing in cities with exceptional cultural, lifestyle or economic attributes — think London, New York or San Francisco — has been with us for years. Still, if there’s to be a sharp drop in home prices, then it would probably be in Canada’s highestpriced markets.

Elsewhere, Guatieri really doesn’t see much likelihood of an abrupt price drop. He points out that with family incomes growing by about four per cent a year, it would be perfectly possible to wipe out our 10 per cent overvaluation simply by watching prices plateau for 30 months. Or they could drop a few per cent and restore fair value more quickly. But in most of Canada, there’s no obvious reason for a sharp drop in prices.