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Possible Black Holes to Canadian Outlook

Housing related highlights from BMO’s North American outlook. BMO expects Bank of Canada  to increase rates starting in spring and end the year at 2% from the current 1%

The Good

Canada’s housing market has stabilized.

After slowing from record highs to more normal levels in the summer, existing home sales picked up in the fall, and prices have reclaimed their peaks. Low mortgage rates and rising personal incomes have kept housing reasonably affordable (at least at current rates) for the typical buyer. As long as prices do not outrun incomes in coming years, housing should remain within reach of buyers, reducing the risk of a correction when rates normalize. Still, higher interest rates and possibly stricter mortgage rules in the federal budget should restrain home sales in 2011.

Not so good

Canadian house prices rise sharply.

Witnessing the bust in other housing markets, Canadians should understand that house prices can’t outrun incomes forever. Thus, it would be irrational for buyers to bid prices sharply higher in coming years, especially since prices have already climbed twice as fast as personal income in the past decade.  But irrational doesn’t mean impossible.

Definitely not impossible primarily because:

  1. Mortgage rates are still affordable
  2. Realtors continue talking up the housing market (Less than 10% of agents I have met think housing will soften)

Canadian household debt mounts.

Canada’s household debt-to-income ratio, though above the current U.S. ratio, is still meaningfully below the peak U.S. ratio in 2007. Still, Canadians could hit a similar debt wall if they can’t resist the lure of cheap money.

Source

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