Canadian Real Estate Is “Playing With Fire,” Approaching Classic Bubble: BMO

The warning is coming from inside the house, and it’s not from one of Bay Street’s bears. BMO senior economist Robert Kavcic said Canada is “playing with fire” in a note this week. Looking at the percent of income needed to carry a mortgage on homes, he doesn’t think 2017 was a bubble. The current situation is rapidly turning into one though. If mortgage rates rise, or stay the same and prices rise at the current pace, the market hits classic bubble levels.

Worse Than The Foreign Buyer Mini-Bubble

When people say this time’s different, they’re right – just probably not in the way they think. Kavcic called the explosive price movement in 2016/2017 a “mini-bubble.” The impact was limited to some segments, and locations. He also maintained while costs sharply increased, it was still manageable. “The result was correcting and taking almost 4 years to recover” after policy makers acted. Today, the picture is a little less optimistic.

Source: BMO Economics. Better Dwelling.

If Mortgage Rates Rise, Canada Is Back To The Late 80s Bubble

Low interest rates motivated sales activity, but also created a debt trap. The cheap carrying costs are making it easy to load up on high debt levels. However, if mortgage rates go back to pre-pandemic levels, “we’re back into late 1980s territory by this valuation metric,” notes the economist.

If Mortgage Rates Don’t Rise, Canada Is Back To The Late 80s Bubble

Leaving mortgage rates where they are sounds like the obvious solution, but that won’t work either. “If mortgage rates stay where they are, but prices keep doing what they’re doing, we’re back into the late-1980s territory by this time next year.”

If rates rise, or stay the same and home prices continue, real estate turns into a textbook disaster. Sounds like a house condo of cards.

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  • Jason Azevedo 3 years ago

    There are people out there so greedy and self righteous they will never believe there is a real estate bubble no matter how much evidence is presented they just think prices will go up even if Canada loses 200,000 jobs because of covid and 90 percent of first time buyers can’t buy a house and somehow they think this is just Canada catching up. lol wow I just can’t believe the nerve of un educated people.

  • Mortgage Guy 3 years ago

    Good take from Bob, but he’s missing a detail about the foreign buyer bubble by looking at “Ontario” affordability.

    The pressures were in Toronto, and its suburbs. Sub-indexing, prices are barely up from then. Toronto condo prices are negative in value from a year before.

    I know it’s difficult to measure the distribution of Ontario as well, but that’s also a factor. More homes out further in the boonies of Ontario, helps to flatten the price spike as the rest of the province fills up today.

    • Ethan Wu 3 years ago

      Nat Bank did an affordability assessment that showed it was at 1980s bubble levels in Toronto in 2017. Not as close, but the issue is compounded by downpayments requiring a much longer period to save than back then.

    • EB 3 years ago

      Exactly this. Toronto landlords will suffer as rental demand flattens. Condo owners (especially of smaller units) are going to take a hit. But there are people who have been saving for a decade to buy in TO and have never been able to make it in due to rising prices who, as a result of the pandemic, are willing to trade amenities for room and finally looking outside the golden horseshoe. That exodus is fueling a boom in the rest of Ontario. One that is fairly sustainable too, because the homes they are buying are far, far cheeper than what they have been banking on on these years.

  • LOL 3 years ago

    Vancouver was filled with campers and tents lining the streets before the pandemic. Not quite a bubble tho. Wait for it….

  • Patrick 3 years ago

    When does the BOC get to buying and selling the houses directly to generate economic activity? Might as well at this point.

  • Herry 3 years ago

    Greed, greed F ing greed !!!!!!!!

  • Man 3 years ago

    Can we ensure government have access to these reports, analysis. I guess either there data is different, they have there own agenda or they are cutout from reality.

    • CT 3 years ago

      I work for a provincial government, and Better Dwelling has given us a feed and institutional reports for free. They’ve also done done calls to answer questions, and it’s been very helpful in understanding some of the pressures in housing.

      It may seem like the government is ignoring these things, but they are working very hard to find a balance between accommodating growth and affordability. Both sides see the issue as unfair to them.

      • Nenad, Toronto 3 years ago

        Please don’t work that hard.

        The issue here is that there is no way for people to provide feedback about all that hard work.

        Majority voting system is filtering any competition / opposition / alternative.

        So, relax and enjoy your benefits and future pension.

      • SH 3 years ago

        Well you’ve failed miserably so far on the “affordable” part.

        Maybe it’s time to change course and put the interests of Canadian middle class workers ahead of the interests of RE speculators, foreign and domestic?

    • Doomcouver 3 years ago

      Oh I’m sure they have access to this data, they just feel powerless to do anything about it. It’s going to be political suicide for any party if the bubble pops on their watch. Politicians had a golden opportunity to enact anti-speculation measures during the lows of the 90s and early 2000s, but they chose instead to relax lending standards and pump another bubble.

  • Aryan 3 years ago

    It is becoming “Too Big To Fail” kind of situation. Government bonds, including BoC Mortgage Bonds, will blow up along with Housing Market if the interest rates rise. It is not in favor of any politician to let this explode. As the politicians are the one’s on wheel nowadays, they will do everything from letting it explode. They will make BoC do every kind of dance, and people like Tiff Macleim who has no F***ing backbone will bend over backwards to please his masters – restart purchase of mortgage bonds, zero interest rates on mortgage, generational mortgage, increase government equity in homes, etc. etc.

    • Jonnace 3 years ago

      Too big to fail? I don’t think that’s how US got hit by the subprime situation.
      This nation clearly has no wealth generation in any sectors at all but in real asset bubbling.
      If inflation rate keeps rising CAD will become like the currencies in African region.
      Soon, many young Canadians/taxpayers will leave this nation and look for better quality of life.
      Stupid capitalism had destroyed the foundation that the nation was building for years.
      Liberal assholes killed the whole economy less than a year.
      How long do you think the bank keep printing the money? It will end soon.

      • Jonnace 3 years ago

        * less than a decade I mean.

        • Erik 3 years ago

          This started with Harper aster the 2008 crash… Vancouver real estate was elevated years ahead of Toronto. It’s not a liberal or conservative party policy but more so a Canadian federal policy to keep this shell game going…

          • SH 3 years ago

            Nice partisan Liberal attempt to deflect.

            Under Harper, Vancouver was the ONLY place in Canada in a bubble. The rest of the country, while overpriced in some places, was certainly not bubbly.

            Under Trudeau, the entire country became one massive bubble.

            That’s reality that Liberals refuse to accept.

  • Ashley 3 years ago

    Govt. will not have any incentive to pop the bubble but quite a downside if it does on their watch. Govt. as it is in minority, maybe make things more worse for new govt. or if they get re-elected same story why pop the bubble.
    IMO impact of higher house prices will start reflecting in economy if immigrants get a sense how much they have to shell out for housing/living in return for easy immigration and emigration of talent from Canada to US for cheaper living and better opportunities.
    At the end of the day either wages will have to rise to justify the prices or prices go down to match the wages, current situation not sustainable.

  • Bob 3 years ago

    Toronto houses are extremely expensive, but it’s not a “bubble”.

    We won’t suddenly see an over abundance of houses for sale, followed by a crash in prices, any time soon.

    There’s enough demand to sustain current prices in 2021 and beyond, even with a rate increase.

  • Sam 3 years ago

    So What happens if suddenly, they flood markets with permits, increase interest on builders and prices climb up a bit as increase on interest is countered by somehow equalizing demand and supply, but interest on buyers stays relatively the same? Because i know no body wants that bubble to pop, or at least not during their time.

  • Marcelo 3 years ago

    If people don’t over pay for house and rental it wouldn’t happen

  • John 3 years ago

    building materials are going up, like wood,3 times , cost of new units is up, labor cost is up, and canada will bring 400,000 new immigrants in 2021, also situation in Hong Kong will make canadian there move back to Toronto and Vancouver, just saw the news, a house in Toronto sold in 2 days and got 620,000 than asked price

  • Claude Taillefer 3 years ago

    This is happening all over the country. I am in Nova Scotia, houses selling for 20 points more than asking with people fighting on the front lawn the day after they are listed.

    Quebec Real Estate is on fire. You can no longer buy a single family home on the island of Montreal for under a million dollars, the Province is up 30 percent over the last 16 months.

    Most of this bubble is being fueled by first time home buying Millenials who have no concept of what it costs to own and maintain a home but want to get in tired of trying to save up to meet qualify.

    This will end very badly.

    • Mortgage Guy 3 years ago

      Statistically, that’s not the case. First-time homebuyers are the lowest ratio they’ve ever been, which is verifiable since they have to declare it for a discount on property taxes.

      It’s a heck of a narrative I keep hearing though.

    • Scott 3 years ago

      Completely agree.

      I’m in NS and see the same thing.

      Plus there is large amounts of money laundering going on too.

      But the realtors here come on the news and say “everything is ok”

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