Yet another report out by BMO reassuring Canadians the housing market is fine and will just “cool rather than crash,” likening it to a balloon with a small amount of air slowly escaping.
They assert that the housing boom will more likely cool than correct, even in condo-driven Toronto, where it’s estimated that about half of all new condos in the GTA are purchased by investors, 22% of all condos are rented, and the cost of owning exceeds the rental income. Sounds good.
“The [BMO] report suggests that alarms about Canada’s housing market by international observers, from the International Monetary Fund to The Economist magazine, are exaggerated or simplistic.” – Globe & Mail
The price-to-income ration for Canada as a whole in 2001 was 3.2. It rose to 4.9 in 2011.
In Calgary the price-to-income ratio jumped from a healthy 2.8 to a 4.1 ten years later while home prices appreciated 118% during that time.
Despite this, BMO believes that with the exception of a few regions, valuations remain only moderately high across the country and that low interest rates will allow incomes to catch up with higher prices and restore proper valuations. The wistful “soft-landing” scenario.
You can read the entire report here. Please feel free to share your thoughts.
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Canada facing subprime mortgage risk
In other news today, Bloomberg obtained 152 pages of documents under freedom of information law from the Office of the Superintendent of Financial Institutions that details how Canadian lenders are loosening standards and offering mortgages similar to U.S. subprime loans that pose an “emerging risk”.
Remember, it was only on Friday that BMO emphatically stated how “solid” CMHC is and how “prudent” their underwriting standards are.
You can read the Bloomberg article here
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Let’s Rewind
You could easily replace “Bernanke” with “Sherry Cooper” and think the following is verbatim from a recent BMO report:
House of Representatives hearing, Feb. 15, 2006:
Mr. BERNANKE: “The housing market has been very strong for the past few years. Housing prices have been up quite a but. Residential investment has been very strong.
It seems to be the case — there are some straws in the wind that housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate; that house prices will probably continue to rise but not at the pace that they had been rising.
So we expect the housing market to cool but not to change very sharply.
If the housing market does cool, more or less as expected, that would still be consistent with a strong economy. In 2006 and 2007, in particular, capital investment and other forms of demand would take up the slack left by residential investment.”
7/1/05 – Interview on CNBC
INTERVIEWER: Ben, there’s been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?
BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it’s important to note that fundamentals are also very strong. We’ve got a growing economy, jobs, incomes. We’ve got very low mortgage rates. We’ve got demographics supporting housing growth. We’ve got restricted supply in some places. So it’s certainly understandable that prices would go up some. I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened is supported by the strength of the economy.
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?
BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.
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Read more in Business Insider’s: 30 Bernanke Quotes That Are So Absurd You Won’t Know Whether To Laugh Or Cry
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