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There was once a time when home prices in two of the county’s hottest housing markets, Toronto and Vancouver, were considered reasonable. No, really.

You just need to turn back the clocks about a decade and a half, Sal Guatieri, a BMO senior economist, tells BuzzBuzzHome News in a recent interview.

“Go back to the start of this century,” he says. “It was thought that Toronto’s housing market and Vancouver’s were kind of reasonably valued,” recalls Guatieri.

“They were coming off long periods of steady stagnation, for the most part, so it was thought that prices were much more fairly valued at the time, at least on the basis of incomes,” he adds.

Incomes are key. Pitting home prices against incomes as a ratio is a way to gauge how affordable a housing market really is.

That’s what BMO has done with median family incomes from Statistics Canada and benchmark home price data from the Canadian Real Estate Association.

While Toronto’s price-to-income ratio sits at eight to one and Vancouver’s is hovering near 11 to one, according to BMO calculations, such disparities between earnings and home values were not always the norm.

Guatieri points out that in 2001, the benchmark Toronto home price was 4.3 times the median household income. “So actually, that was quite undervalued,” he says.

By 2005, the price-to-income ratio had hit five to one in Ontario’s capital. “I would suggest five to one seems reasonable for a large metropolis with attractive amenities, such as Toronto,” pinpoints Guatieri.

“Vancouver back in 2005 was six-and-a-half to one and in 2001 was just over five to one, so that gives you some indication of what is kind of the fair value for home prices in Vancouver,” the economist says.

As Guatieri demonstrates with the Toronto example, factors such as amenities and the size of a city influence what’s determined to be fair value in a market.

He says the “conventional rule” is “anywhere from three to four times annual family income” but clarifies “I’m not talking about gateway cities or large metropolises that obviously justify much higher price-to-income ratios than smaller cities.”

When that inflow of foreign wealth at least abates or when interest rates go up, we will see a bit of cooling in the housing markets in Vancouver and Toronto.

For Torontonians and Vancouverites looking for a fairly valued home, there are a number of options elsewhere in Canada — even in relatively big cities: “Montreal, Calgary, Winnipeg, you’re talking all below four to one, so all those markets are very fairly valued,” Guatieri tells BuzzBuzzHome News.

Assuming house hunters don’t have access to a time machine and don’t feel like relocating, Guatieri mentions three triggers for improved affordability, but his outlook isn’t exactly encouraging for those looking to break into the market today.

If interest rates plunged “much further,” that could make ownership more attainable. But the economist doesn’t see rates, which are already at historically low levels, going down substantially.

Next, there’s the prospect of higher earnings providing more buying power. “We’re already seeing fairly strong job growth, it’s very unlikely we will see an acceleration in job and income growth in Toronto or Vancouver,” says Guatieri.

“So that really just leaves you prices either stagnating and allowing incomes to catch up or ultimately correcting,” he adds.

The bears have been calling for the latter for some time. Remember The Great Real Estate Crash of 2013? Probably not, because despite making a headline, it didn’t happen.

Instead of doom and gloom, Guatieri cites a BMO outlook that’s more dovish and appears to fall in line with a soft-landing scenario.

“Our general view… is that at some point when that inflow of foreign wealth at least abates or when interest rates go up, we will see a bit of cooling in the housing markets in Vancouver and Toronto — some very mild decline in prices,” he concludes.

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