While there is growing speculation that the Canadian housing market is a bubble ready to implode, a new report from BMO Capital Markets Economics asserts that market valuation is only moderately above long-term trends.

“All things considered, the Canadian housing market does not appear to be in a bubble, and is unlikely to suffer a U.S.-style collapse,” say BMO economists Earl Sweet and Sal Guatieri. “A comparison of the ratio of prices to incomes with the long-term trend suggests Canadian house prices were overvalued by as much as 18% in late 2009. However, a 3% decline in seasonally-adjusted prices so far this year, coupled with continued moderate income growth, has reduced overvaluation to a less worrisome 11% in the third quarter of 2010.”

Commenting on the report, BMO Bank of Montreal vice president of lending and deposit products, Martin Nel, says, “Due to historically low rates, mortgages remain affordable today. Even with the notable rise in house prices during the past few years, the costs to service an average priced home, including principle and interest, are running close to long-term norms.”

The report does take note of regional differences, with B.C.’s housing market shown to be more overvalued than Ontario’s or Alberta’s. “Unlike these two other provinces, B.C. house prices have continued to trend higher in 2010, reaching new peaks in September,” say the two economists. “Consequently, it likely faces a greater downside risk than other provinces. Valuations in Alberta and Ontario are closer to the current national estimate.”

IE