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RAHB data shows in October the average home price for Hamilton went up 7.1 per cent year over year, to $602,029. As recently as 2015, average Hamilton home prices were below $400,000.

Peter Power/The Globe and Mail

A recent report puts the real estate market in Hamilton into an exclusive club with Toronto and Vancouver: all three cities are significantly overpriced compared to normal markets.

The International Monetary Fund studied 11 large metropolitan areas in Canada and found that while there’s been price growth in a number of cities across the country, most home pricing was explainable by conventional understanding of macroeconomics in real estate. The working paper, Assessing House Prices in Canada: Borrowing Capacity and Investment Approach, states that in most markets median household income and mortgage rates should provide a rough guide to pricing.

But in Hamilton, Toronto and Vancouver the authors say “house prices have increased beyond the values implied by the fundamentals.” The IMF calculated house prices in Hamilton are 60 per cent higher than the fundamentals would suggest and in Toronto and Vancouver it’s close to 50 per cent higher. “House prices would have to drop by roughly 30 per cent to align with the current fundamentals in these markets,” the paper contends.

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The study applied valuation models based on borrowing capacity (where housing prices stay “attainable” based on the price of down payment and debt) and net-present value (based on the ability for rental income to cover costs). Toronto and Vancouver’s woes with these measures are well known, they are the two most expensive markets in the country. But Hamilton’s inclusion in the unaffordable club is a relatively new phenomenon for a traditionally blue-collar city with a long history of modest price growth.

“We do agree with the IMF that Hamilton residential properties may not be affordable for many who live in the city," said Carol Ann Burrell, president and CEO of Realtors Association of Hamilton-Burlington (RAHB). "For those currently looking to buy for the first time, affordability can also be a challenge. There are many in the city, however, who have lower incomes and purchased a property years ago. With the average prices of residential properties in Hamilton doubling over the past decade, these Hamiltonians have seen significant gains in their equity.”

RAHB data shows in October the average home price for Hamilton went up 7.1 per cent year over year, to $602,029. As recently as 2015, average Hamilton home prices were below $400,000.

The IMF calculated that when it comes to debt-service-to-income (DSTI), median incomes in Hamilton haven’t kept up with the property prices. Before 2016, Hamilton household DSTI was about 30 per cent, but in the past three years that figure has risen sharply to almost 45 per cent.

Until early November, the Canada Mortgage and Housing Corporation (CMHC) had flagged Hamilton as a high-risk market for, but said that beginning in August the situation began to cool down. The CMHC report still rates Hamilton as having moderate risk of “overheating” and “accelerating” prices, but the agency lowered the valuation risks from moderate to low between the second and third quarter.

But RHAB’s own market data said that prices and sales went up again in October. “We started out the year in a much more balanced position than we experienced in 2016/2017, but the last few months have been favouring sellers,” Burrell said.

The IMF and the RAHB both posit some of the price growth is due to house-hunters sick of even higher prices in the Greater Toronto Area bidding up properties in Hamilton. But some local brokers don’t accept the Toronto invasion theory.

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“We’re not seeing a tsunami of demand out of Toronto, primarily because of commute time,” which can be more than an hour to central Hamilton, said Judy Marsales, an independent real estate broker with 38 years experience in the city. She said that while 2017 was a wild time. “The days of multiple offers and bidding wars are gone.”

Ms. Marsales said some of the median income to price disparity has to do with demographics; she sees a lot of seniors on lower incomes staying in homes, while younger families are able to take advantage of low interest rates and spend well above their income. Sometimes perhaps too much to get into a house they want.

“There are times it is concerning, that judgment we leave to the financial people they deal with. They have more information on their financial capability,” she said.

But some mortgage professionals are also worried about what they are seeing in Hamilton.

“Whatever CMHC suggests, I assure you that those of us who deal with homeowners every day, we see debt stalking middle- to lower-class people,” said Ron Butler, lead broker for Butler Mortgage Inc. “We constantly hear of next generation Hamiltonians having to buy in Grimsby or Welland. And the existing residents often feel the effects of rising food, utility and gas prices and they generally earn less than those in the GTA.”

The IMF did say that other Canadian markets have recovered after prices decoupled from market fundamentals in the past, the most recent examples include Calgary and Edmonton between 2006 and 2012. But in those markets income growth was strong and interest rates fell.

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“The housing markets in Hamilton, Toronto, and Vancouver are not likely to benefit from such significant declines in interest rates. This could increase risks associated with rapid price corrections,” the IMF paper warns.

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