BMO predicts a 76% correction in Canadian real estate markets by 2023.
Canadian real estate prices are falling, but the bubble hasn't burst yet. BMO told investors over the weekend that housing prices might diverge by 76% in Q1 2022. Home prices add a tiny premium to wage growth and interest rates. Canada's divergence is the largest in 40 years. The bank forecasts a correction by 2023.
Canadian home prices are wildly inflated
Canadian real estate bucked the trend, indicating a bubble. BMO thinks actual property prices have risen 3% annually since 1980. This represents actual growth in wages and interest rates, according to the bank. That's changed.Southern Ontario's Bubble Is Worst
The bank says that the majority of the country has experienced exuberant gains. As of Q1 2022, Ontario home prices are 55.4% above trend. Southern Ontario is the most overvalued, with Toronto (+41%) and its exurbs (+76.3%) Cottage country (+63.6%) is likewise overvalued and won't enjoy realizing its genuine value.The bank notes that while Toronto prices were 41% above trend, exurbs were more than 70% ahead.
Atlantic Canada (+34.7%), Quebec (+32.6%), and BC (+21.4%) also exhibit steep trend deviations. If normalization occurred and a third of price gains were cut, you wouldn't be thrilled.
Not all provinces are overvalued. Manitoba (+12.3%), Saskatchewan (-3.4%), and Alberta (-5.0%) all rose or fell somewhat. There's less to fix.
Canadian prices are correcting
Canadian real estate values are decreasing, which is impossible. Many local markets are significantly lower than the national average.BMO told investors, "Canadian house prices are correcting, and several local markets are down 20%." We expect the adjustment to last through most of 2023 as the market absorbs higher borrowing prices and a broader economic slowdown weighs on demand.