Homeownership costs overblown, says report

While recently a report from the Organization for Economic Co-operation and Development (OECD) claimed that Canadian home prices are 64 per cent overvalued, a BMO report is vehemently rejecting that assertion.

“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 for 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.”

His report notes that on a national basis, ownership costs are only moderately more expensive versus renting. In fact, considering current mortgage rates – around 3 per cent for a five-year fixed rate – home valuations continue to run long-run norms.

Still, the report concedes that the gap between owing and renting widens the shorter the period of ownership. That’s even more so for the typical new-build condo in Toronto.

“While we would downplay the bubble talk,” says Kavcic, “the risk of buying for a five-year period probably outweighs the potential reward given current market conditions.”

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