Canadian Real Estate Prices 38% Overvalued, Largest Trend Deviation In 40 Years: BMO

Canadian Real Estate Prices 38% Overvalued, Largest Trend Deviation In 40 Years: BMO

Canadian real estate prices have never been this overvalued, according to new analysis from BMO Capital Markets. In a research note to clients, the bank didn’t just explain home prices are overpriced. Since 2020, home prices have made the largest trend deviation in at least 40 years, and are likely to correct. 

Canadian Real Estate Prices Are Up 57% Since 2002

Canadian real estate is the bubble heard worldwide. Cities in Canada were already topping global housing bubble lists before 2020, but now it’s the whole country. Flooding the system with cheap money spread exuberance across Canada.

Just how crazy did home prices get? The price of a typical home across Canada has increased a whopping 57% since 2020. About a third of a typical home’s value was made in the past two years. Put another way, just the price gains from 2020 to April 2022 was the equivalent of the price of a whole home in 2009. Only in Canada would that data point not trigger a WTF moment when reading it. People genuinely think it’s normal. It’s not.

Canadian Home Prices Didn’t Always Grow This Way

BMO Capital Markets wants to make it crystal clear — this is far from usual, even in Canada. “Real home prices in Canada have historically grown at about 3% per year dating back to the early 1980s, roughly reflecting inflation, real wage growth and gradually falling interest rates,” explained Robert Kavcic, a senior economist with the bank.

“In this latest episode, even as inflation has accelerated to multi-decade highs, real home prices have surged by more than a third in the span of two years, clearly stretching beyond that long-run baseline growth trend.”

Source: BMO Capital Markets.

The above chart provided by the bank shows home prices are significantly extended. “For now, just note that as of the first quarter, when we believe the market peaked, real Canadian home prices sat 38% above trend, the widest deviation in the past 40 years,” he said.

The million dollar question (well, $882,400 in April) is how much home prices will correct. There’s not a lot of historical evidence to show home prices are able to maintain such a large deviation. The longer surges like this last, the more capital is diverted from consumer spending for basic shelter. This creates two options — a home price correction  or a home price correction and recession.