Canada's Housing Bubble

Analysis of the real estate bubble in Canada --

Will housing decline be mild or 'something much nastier'? Print E-mail

Jan 09, 2012 Michael Babad Globe and Mail

Whither the real estate market?

Canada’s housing market is headed for a cooling-off period, which is no surprise, given the uncertain economic climate, a rising unemployment rate and recent changes to mortgage rules. The question is the path, and how steep that downturn will be.

By many accounts, the slowdown will not become a bust, with a moderate decline in prices over the next couple of years. Not all observers believe that, though.

“The conventional wisdom is that Canadian housing is headed for a slowdown (at best), with many looking for something much nastier,” deputy chief economist Douglas Porter of BMO Nesbitt Burns said in a report this week.

“While the timing of said slowdown remains up in the air (and it’s no foregone conclusion it will start this year), it is highly unlikely that Canada’s housing market can continue its recent winning ways.”

Mr. Porter’s colleague at BMO, senior economist Sal Guatieri, doesn’t expect the “nastier” turn, saying in a separate report that the market is losing steam, and that valuations remain a worry, but that there will still be “modest gains” in overall sales this year, along with steady prices, a dip in housing starts and more moderate mortgage growth compared to its pace of almost 8 per cent.

"If you listen closely you can hear the sound of air seeping out of Canada's housing balloon," Mr. Guatieri said in his report.

"(Unlike a bubble, a balloon can deflate slowly.) Outside of Toronto and Saskatchewan, home sales have moderated since new mortgage rules were introduced in March (for the third time in four years). Markets are balanced in over half the country, but sellers still rule in Toronto, Saskatchewan and Manitoba. Prices have pulled back moderately from spring highs, led by once white-hot Vancouver."

There are regional differences, of course. Senior economist Jacques Marcil of Toronto-Dominion Bank believes housing markets will weigh on the economies of British Columbia and Ontario.

Mr. Marcil said as he projected a “significant correction” this year, noting that the hot Vancouver market probably peaked in 2011.

Mr. Marcil expects resales in B.C. to sink 3.7 per cent this year, and prices 3.5 per cent.

"The correction will extend into 2013, as unit resales fall a further 5 per cent while prices slip 4.4 per cent," he said.

Indeed, the Real Estate Board of Greater Vancouver reported this week that sales last year climbed 5.9 per cent from 2010, but slowed at the end of the year. Sales in December fell 12.7 per cent from the same month a year earlier. And while prices were still up by 7.6 per cent, they were 1.5 per cent below their peak of June, 2011.

Mr. Marcil also expects Toronto’s condo market to slow.

"In addition to the growing pipeline of supply, the knock-on effects of financial market volatility to buyer confidence will likely result in a cooling down in condominium sales in the region in 2012 and 2013,” he said.

For now, the Toronto housing market is still going strong over all, The Globe and Mail’s Sean Silcoff reported this week.

According to the Toronto Real Estate Board, sales in December climbed 10.1 per cent from a year earlier, and prices rose 4 per cent. That marked the end of the second-strongest year in records dating back to 1994.

Markets will be watching next Tuesday when Canada Mortgage and Housing Corp. reports the level of home building in December. While housing starts are expected to begin dipping going forward, December's reading is expected to show an annualized reading in the area of 190,000.

"Analysts in recent months had been expecting housing construction to slow, led by weaker multiples construction - with the heated condo market losing its affordability edge over detached properties," said CIBC World Markets economists Emanuella Enenajor.

"But November’s 13,000 fall in starts to 181.000, the lowest level in nine months, came as an outsized surprise, even with the weakness driven by multiples (condo) building. While we expect housing starts to trend down in the quarters ahead, November’s sharp plunge could correct in December, with starts rising to 189,000. However, even with the year-end uptick in home building, weak housing starts readings in earlier months suggests that residential construction could be a drag on [fourth-quarter] GDP growth, after providing a generous lift in [the third quarter]."

As senior economist Michael Gregory, also of BMO Nesbitt Burns, sees it, Canada's housing market is "stabilizing" amid slow job growth in the second half of last year, waning consumer confidence, a drop-off in foreign investment from Asia, and the tighter mortgage rules. The bounce-back in housing starts that is believed to have taken place in December in fact marks just a partial rebound in starts of multiple units, such as condos, and poor weather in some regions in November.

"Nevertheless, stabilization is still a remarkably robust outcome given the abovementioned housing headwinds, and reflects the offset provided by low borrowing costs," he said.

"However, the allure of low interest rates is waning, as Canadian households amass record high debt burdens and policy makers sound the alarm on related risks to economic and financial stability, pointing to a cooler pace of housing activity this year."

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