YES: RISING RISKS AHEAD

Increases in the big three cities mask the truth

Doomsayers calling for a Canadian housing crash have piped down in the past year as sales and prices have soared, but they haven’t been entirely wrong. Prices have continued to climb in but a closer look at the numbers shows a few hot markets are hiding weakness in many others. Doug Porter, chief economist at Bank of Montreal, pointed out recently that Calgary, Toronto and Vancouver are skewing the data. “The hot housing market is really only a three-city story,” he noted.

Take those red hot markets out of the equation and you have what Porter calls a “mediocre” housing market at best. In a report looking at Canada’s 26 biggest housing markets, he noted almost half had a sales decline in August. In particular, housing markets east of Ontario are practically dormant, though Winnipeg and Sudbury, Ont., were also pegged as weak.

It’s no surprise Vancouver, Calgary and Toronto are masking the truth. Put together, the three account for about a third of housing sales and almost half the value of homes sold in Canada. But perhaps the most concerning aspect of the housing weakness is that it is happening while mortgage rates continue to hover at record lows. Economists warn that the real unfolding will only happen when the Bank of Canada raises interest rates, something most expect will happen in the second half of next year.

Craig Alexander, chief economist for Economics, has said he expects Canada’s housing market to continue gradually cooling next year as interest rates gradually rise. “In the near term, the housing market and household debt levels present an upside risk to our forecast,” he noted. “Borrowing rates remain at record lows and housing momentum has stayed strong. Over the medium term, we still expect a cooling trend, consistent with a gradual increase in both trend inflation and interest rates.”

The threat for the big three markets right now is that prices have been trending higher than incomes for some time. Porter cautioned that scenario could end with higher interest rates. “The major potential flashpoint is that prices in the three hottest cities — Calgary, Toronto and Vancouver — are rising faster than family income, further straining affordability,” he said in a note.