From the star:
http://www.moneyville.ca/article/948110--canadian-housing-market-moderately-overvalued-bmo
The Canadian housing market is “moderately” overvalued, but a significant correction is likely not in the cards, says a report by the Bank of Montreal.
The ratio of average resale prices to personal incomes is currently 14 per cent above the long-term mean, suggesting that prices have gotten ahead of incomes, says BMO economist Sal Guatieri in a report to be released Friday.
“Home prices are expected to cool and prices stabilize this year in response to higher interest rates, tighter mortgage rules and lower affordability,” said Guatieri. “While we do not expect a significant correction nationwide, the risk of such would increase if prices were to continue to outrun incomes or if interest rates were to increase rapidly.”
During the last real estate bubble in 1989, prices were about 21 per cent above incomes in comparison. In the United States in 2005, prices were 26 per cent above incomes.
Guatieri says the relatively solid economy in Canada means that incomes are expected to rise over the next year and a half, catching up to prices.
“If incomes climb 8 per cent and prices stabilize as we expect, the current overvaluation would fall to 6 per cent, hardly the stuff of corrections,” said the economist.
Guatieri’s forecast is based on home prices stabilizing and incomes rising in order to head off any correction. If house prices continue to rise while incomes remain stagnant, then a correction would be more likely.
Some analysts have said that a price adjustment downward of anywhere from 5 to 25 per cent is not out of the question. The consensus estimate is that prices will remain flat over the next several years, allowing incomes to catch up with house prices.
Toronto housing economist Will Dunning says the employment market is showing signs of recovery, but it will take time to ignite demand, even if there is income growth.
“Housing demand is still showing the after-effects of the recession,” said Dunning. “The recent job creation will start to positively affect housing activity later this year and into next. It takes time for job creation to get converted into housing demand, and there I expect that the housing data will be tepid for a while.”
A report this week by Scotiabank says prices are still forecast to rise by the rate of inflation, or about 2 per cent. However, economist Adrienne Warren warned that there seemed to be a looming oversupply of condominiums in some cities.
As expected, the market is trending down from last year.
Existing home sales in the Greater Toronto Area for February were down by 14 per cent from a year earlier, according to figures released by the Toronto Real Estate Board Thursday.
The board reported 6,266 transactions last month, compared with 7,291 in February of 2010.
The average selling price of a home for February was $454,423, which is 5 per cent higher than the price reported a year earlier.
The bolded line particularly stood out to me. Who is expecting 8% income increases over the next year and 1/2? My understanding is that incomes have hardly budged in the past 10 years. Why would one work on this kind of assumption? Am I missing something or do others feel this prognostication is totally out to lunch?
