The report states:
We expect home sales and housing starts to moderate in the year ahead, with strength in Alberta contrasting with weakness in pricey B.C. and Toronto. Prices are expected to increase modestly in Alberta, stabilize in most other regions, and decline moderately in Vancouver and Toronto.
Elevated household debt, together with new rules limiting insured mortgages to 25-year amortizations and to homes priced under a million dollars, should encourage a further moderation in mortgage growth.
Still, the continued escalation in Toronto home prices is worrisome. Prices will need to stabilize soon, if not ease, to avoid a material correction when interest rates rise.
The Toronto market is also vulnerable if the economy slips into recession. A dearth of detached-homes available for sale has led to a boom in condo construction, with supply starting to outrun strong demand.
Investors, who account for about half of new condo demand, could bolt if prices soften, aggravating a correction.
BMO is also predicting that the Bank of Canada will leave the overnight rate steady until July 2013, about three years since the last rate hike.
There are risks that can materially affect Canada’s economy and housing market. BMO lists them in the order of likelihood and propensity to cause damage:
- a euro breakup triggers widespread contagion via financial, trade and confidence links,
- a U.S. downturn arising from failure to address the “fiscal cliff”,
- a hard-landing in China’s economy slashes commodity prices, and
- a deep correction in Vancouver and Toronto house prices weakens household wealth and residential construction.
BMO explains that, “while the euro crisis poses the biggest direct threat to Canada’s economy, many risks are mutually reinforcing. A euro breakup could lead to a global recessionand lower commodity prices, which could cause a correction inCanada’s house prices that amplifies the economic downturn.”
You can read the entire report here