Buy or Rent? BMO Economics Says Canadian Home Prices Are Not Highly Overvalued

Buy or Rent? BMO Economics Says Canadian Home Prices Are Not Highly Overvalued 
When debating renting versus buying, BMO Economics studied two
scenarios in the Toronto market: A condo with a five-year horizon,
and a detached home with a 15-year horizon 
TORONTO, ONTARIO -- (Marketwired) -- 06/14/13 -- A new report from
BMO Economics release today challenged the notion that Canadian home
prices are highly overvalued versus the price of renting a home. 
Recently a report from the Organization for Economic Co-operation and
Development (OECD) claimed that Canadian home prices are 64 per cent
overvalued. This has fuelled more debate over Canadian house prices,
with much attention focusing on ownership versus renting, and whether
or not someone in today's market should opt to rent instead of buy. 
"We can confidently dispel the notion that Canadian home prices are
egregiously overvalued versus rents, but they're not cheap either,"
said Robert Kavcic, Senior Economist, BMO Capital Markets. "Renting a
Toronto condo is a wise alternative to buying for those with a
shorter time horizon. However, young families with a longer time
horizon in the detached market should not be deterred from buying,
but also shouldn't expect wealth gains like those of the past
decade."  
The report noted that on a national basis, ownership currently looks
only moderately expensive versus renting. Using current market
mortgage rates - around 3 per cent for a five-year fixed rate instead
of posted rates - leaves valuations almost bang on their long-run
norm. 
Mr. Kavcic noted that there are regional differences within the
numbers:  


 
--  On the west coast, Vancouver valuations have begun to compress from very
    elevated levels, though ownership still remains expensive versus
    renting. 
--  In Calgary, both housing prices and rent prices are rising, so the gap
    is stable. Calgary's market looks pricey, but well below levels seen at
    the height of the energy boom, and resurgent rent growth has helped
    offset recent price gains. 
--  Toronto appears only slightly overvalued compared to historical norms,
    but not at all at prevailing 3 per cent mortgage rates. Notably, the
    city is miles away from the severe bubble conditions seen in the late
    1980s. 

 
When considering the question of renting versus buying, BMO Economics
looked at two scenarios in the Toronto market: a condo with a
five-year horizon, and a detached home with a 15-year horizon.  
The Short Term 
"With a raft of completions potentially hitting the resale market in
the coming years and interest rates expected to grind higher, Toronto
condos will have to defy some stiff headwinds," noted Mr. Kavcic.
"While we would downplay the bubble talk, the risk of buying for a
five-year period probably outweighs the potential reward given
current market conditions." 
The Long Run 
For detached houses with a 15-year horizon, current valuations don't
appear to be a major deterrent to buying for the long run. "The
practical limitations of moving a family among - or even finding -
detached properties, associated moving costs every few years, and the
likelihood of not actually selling after 15 years - given significant
closing costs and mortgage payments stopping after 25 years - all add
to the case for buying," said Mr. Kavcic. 
"The decision to rent or buy is a very personal one and is determined
by a variety of factors that need to be carefully weighed before
taking the next step - whether for the short or long term," said
Laura Parsons, Mortgage Expert, BMO Bank of Montreal. "A mortgage for
some can be seen as a type of savings plan, particularly if they view
their home as a financial nest egg for their retirement years, as
many Canadians do." 
Ms. Parsons noted that those who choose renting over owning property
should consider working closely with a Mortgage Specialist to build a
more aggressive long term saving and investment plan, as they will
not be able to rely on the value of a property to bolster their
retirement savings down the road. 
About BMO Financial Group  
Established in 1817 as Bank of Montreal, BMO Financial Group is a
highly-diversified North American financial services organization.
With total assets of $555 billion as at April 30, 2013, and more than
46,000 employees, BMO Financial Group provides a broad range of
personal and commercial banking, wealth management and investment
banking products and solutions.
Contacts:
Media Contacts:
Matthew Duffin, Toronto
(416) 867-3996
matthew.duffin@bmo.com 
Peter Scott, Toronto
(416) 867-3996
petere.scott@bmo.com 
Valerie Doucet, Montreal
(514) 877-8224
valerie.doucet@bmo.com 
Laurie Grant, Vancouver
(604) 665-7596
laurie.grant@bmo.com 
Internet: www.bmo.com
Twitter: @BMOmedia
 
 
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