11/15/2014 12:09 EST | Updated 11/15/2014 12:59 EST

‘Some Correction' Coming To House Prices, BMO Says As Price Growth Stumbles

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With the U.S. economic recovery now firmly in place, the Bank of Montreal sees interest rates rising next year. And that will “cool red-hot housing markets in Calgary, Toronto and Vancouver.”

In its latest North American outlook, the bank sees U.S. interest rates begin to rise in the second quarter of 2015, with Canadian rates starting to rise six months later.

Mortgage rates in Canada depend on both U.S. and Canadian interest rates, and BMO sees “some correction” coming to Canada’s housing markets, particularly Toronto and Vancouver, once rates start rising.

The outlook doesn’t make any concrete predictions about prices, but it estimates that a two percentage point increase in interest rates would mean a typical Toronto bungalow would have to be 11 per cent cheaper in order to maintain the same mortgage costs as today.

“It’s difficult to see prices staying at current lofty levels if interest rates don’t stay at current crisis levels,” the report concludes.

The Teranet-National Bank house price index released this week shows house prices well up from a year ago, by 5.4 per cent on average, to yet another record high.

But those hikes seem to have fizzled in just the past month. House prices were down slightly in six of the 11 metro areas covered -- Toronto, Ottawa, Halifax, Winnipeg, Edmonton and Victoria.

Vancouver, Calgary and Hamilton continued to see price growth, both year on year and over the past month.

Montreal and Quebec saw slight price hikes but those markets have been flat over the past year.

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