Pop goes the...balloon?

Sonya Khanna

Business Editor

Don’t get it twisted; it’s a housing bubble, not to be mistaken with the housing balloon. A recent report published by the Bank of Montreal suggests that shocks in the economy that led to spikes in interest rates, prompting a recession or hindering foreign investment, shed light on an underlying risk of material correction, due to elevated valuations.

“With the exception of a few regions, valuations remain only moderately high across the country, especially when low interest rates, demographics, construction costs, land-use regulations and foreign capital inflows are considered,” said Sherry Cooper, Chief Economist of BMO Financial Group. “Low interest rates should hold affordability in check for some time, allowing incomes to catch up with higher prices and restore proper valuations.”

Sherry Cooper suggests that the traditional view of the housing market as a bubble is less realistic and more fragile than what it seemingly more correctly embodies – a balloon.

“Barring one of these triggers, however, a dramatic correction is unlikely,” said Cooper. “In our view, the national housing market is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a ‘pin’. In most regions, where valuations are just moderately high, the air should seep out slowly, as rising incomes catch up with higher prices, allowing valuations to normalize before interest rates do.”

Although low interest rates have sparked concern, with experts zoning in on household debt as a primary area of interest Cooper insists that a market correction is unlikely and posits with a heap of optimism that debt levels relative to income are not as troublesome as some suggest.While some may be quick to suggest that Canadians are suffocated in a web debt, Cooper suggests that the debt burden of Canadians pales in comparison to that of Americans at the peak of the housing bubble.

“Even today, after four years of U.S. deleveraging, household debt ratios are lower in Canada,” said Cooper.

Low interest rates have prompted affordability in the housing market on a national basis. With the cost of housing not entirely out of reach, low mortgage rates have enabled homebuyers to fork out roughly over one-third of disposable income on mortgage payments.

Despite these figures, Cooper indicates that the lifespan for low interest rates is nearing its end and the inevitable spike in interest rates will bring about even a moderate two-percentage point increase, normalizing levels and putting a damper on the affordability of housing, slowing the market. As roughly 68 per cent of mortgages run under fixed terms ranging from five years or more, moderate hikes in rates won’t likely scorch current homeowners. According to the report, most variable-rate holders will likely lock-in when rates begin to climb. In the past decade, home ownership in Canada has reached monumental levels, peaking roughly four percentage points to 70 per cent; real viagra without prescription however, recent cooling of the housing boom has led to a drop in sales in provinces such as British Columbia, with sales softening in Vancouver.

Canadians actively on the market for a new home and eager to save a bundle of cash in interest rates through the duration of the mortgage should consider maximum amortization of 25 years. this will allow the financially weary Canadians anxious to encompass a debt-free lifestyle.