BMO Capital Markets issues a clarification for investors on Friday morning about the real estate market stating:

Canada’s housing affordability had already reached its limit, making price reductions necessary to keep moving.

This week’s interest rate hike has made mortgage payments now exceed the most extreme bubble in Canada that occurred in the late 1980s.

Bank of Montreal says that unfortunately, this latest bubble has also led to the country’s most extreme price collapse.

The Canadian real estate market has just been broadly knocked out, but it is still struggling.

On Wednesday, the Bank of Canada (BoC) raised its interest rate once to the highest level since 2008.

By doing so, they hope to reduce “excess demand” and tame the highest price growth in 40 years.

This (intentionally) will make it harder for prices to keep rising.

Robert Kavcic, BMO’s Chief Economist, warns that “Wednesday’s 100 basis point interest rate hike by the Bank of Canada could be a knockout blow to the housing market (at least for anyone who doubts the correction is underway).”

He adds before comparing the ridiculous valuations: “The simple math makes it so.”

Canadian extended valuations have already reached ridiculous levels showing how much prices must fall for it to make sense.

He estimates that a median-priced home in Ontario got a mortgage payment boost of $3,000 monthly last year.

It was already very high, but assuming the mortgage today reached 4.5%, the same home would have to pay $4,700 monthly for the mortgage.

This is a record number surpassing the late 1980s real estate bubble.

Remember we are not talking about Toronto. This matter concerns the entire province, where distant suburbs have outperformed the city.

The budgeting shows that prices need to fall by about 36% less than annual income growth.

That would support last year’s sales level with the same low inventory level.

Today much better supply is provided and sales are worse, so this is interesting.

It will be difficult to maintain this sales level without further price declines.

It is also noted that this coincides with the slight price declines seen in the second quarter of this year.

Canadian real estate prices have exploded to surpass the 1980s bubble, making it now the most dangerous as the real estate bubble in Canada in the late 1980s was the most extreme in the country’s history.

What followed was also the most extreme price correction, leading to almost two decades of stagnant real estate prices afterward. Today’s environment is much worse.
 

Kavcic said: “Even after adjusting mortgage payments for income growth over decades, real mortgage payments will exceed those at the peak of the late 1980s market.”

This, of course, unless housing prices continue to fall.