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BMO On The Potential For 10-20% House Price Correction

CANADA
  • BMO believe the housing market peaked in Q1 at a point that real home prices sat 38% above trend, the widest deviation in the past 40 years. Toronto tops the list with 41% above trend but with suburbs and exurbs up by more than 70%.
  • With mortgage rates rising, a 10-20% decline in prices would be needed just to maintain current (stretched) affordability on the assumption of mortgage rates rising from 1.5% to 4% and with steady income growth.
  • Similarly from a property investor perspective, cap rates moving from 3% to the 4-5% range (both higher GoCs and more normal spreads) could carve around 20% off the underlying asset price.
  • But the mortgage market should be able to contain the spillover: it’s helped by broad use of full-recourse mortgages and stress testing to insulate the financial system from a capacity-to-pay angle.
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