Blogs & Comment

House prices still marching ahead

The warnings of housing bears seem to be wearing thin.

Whatever happened to the housing bust that was supposed to ensue from house prices escalating to high levels against incomes, GDP, rents, etc? The Teranet-National Bank National Composite House Price Index reported today that Canadian home prices in July were up 1.3% from the previous month—the fourth consecutive monthly increase exceeding 1% and the eighth consecutive monthly increase overall. Most city indexes contributed to the July monthly gain: prices rose 2.3% in Calgary, 1.7% in Toronto, 1.0% in Ottawa, 0.9% in Vancouver and 0.5% in Montreal. Only Halifax declined, by -0.9%.

Full steam ahead, it seems to be in the housing market. Ratios of house price to incomes, GDP, rents, etc., make for scary articles and headlines but their predictive value has not been as good as affordability indexes, as I have argued. The latter include mortgage rates, a vital component of the cost of carrying a mortgage—and it appears the currently low levels of mortgage rates have compensated for household incomes falling behind house prices.

Those mortgage rates won’t increase materially unless the economy is picking up speed. But an expanding economy is also creating jobs, so the rise in mortgage rates should be offset or softened by higher employment levels. Maybe Canada will escape a U.S.-style housing collapse, after all? That could depend on how overvalued houses do become and the global commodity boom. If valuations go higher and commodities crater, the landing could be rougher.