Canadian housing crash unlikely
Many economists disagree with a recent report by the Canadian Centre for Policy Alternatives (CCPA) entitled ‘Canada’s Housing Bubble: An accident waiting to happen’.
It states that Edmonton, Montreal and Vancouver’s housing markets are those most at risk of a housing crash. In the worst of three scenarios, David Macdonald, the author of the CCPA report, says Edmonton house values would drop by 39 per cent in less than three years, while Montreal and Calgary would suffer losses of 30 per cent. Vancouver prices would also drop by 30 per cent (“a gut-wrenching $66,000 a year loss in property value over almost three years”), while Toronto values would drop by 20 per cent and Ottawa’s by 14 per cent.
“I think Canadians have come to expect that their houses will increase in value by five per cent to 10 per cent a year and the truth is, like the U.S., that kind of return on investment simply can’t continue indefinitely,” says Macdonald. “Record-low mortgage rates and deregulation of the Canadian housing market means that housing prices are getting far outside of their historical ‘comfort zone’. My concern is that when we get outside of that zone, housing prices become much more volatile and can be affected quite dramatically by changes in mortgage rates.”
However, will Canada’s economic stability be sufficient to avoid a downturn like that seen in the United States? Mario Lefebvre of the Conference Board of Canada is one of many economists who disagree with Macdonald’s view.
“Let’s put things in perspective: the Canadian housing market has generally been booming for about a decade now (except for a slowdown during the recession), and the Conference Board of Canada has long claimed … the market would have to come back to more normal levels of activity,” says Lefebvre. “This is what’s happening right now. It has to be stressed that 24 of 48 markets are currently showing a balanced stance in their existing home markets, a sign that the recent large declines in sales have more to do with a return to more normal levels of activity than the start of a steep downturn.”
Lefebvre says, “We are not the U.S. The house price bubble in the United States came about due to elements that have less to do with economic fundamentals than with U.S.-specific laws…If anything, Canada will see a pause in home price growth with possible marginal declines in a few markets, but nothing near what the United States has been through.”
Another factor that is cited in the argument that Canada will avoid a crash, is that most Canadian homeowners can afford their mortgages in the long run even if there is an increase in interest rates. It is generally accepted that there will be a decline in house values across the board by about 10 – 15 per cent but that should just return levels to those seen in 2007.
BMO Capital Market’s Sal Guatieri said that in the decade before the U.S. crash, prices in that country rose by “an eye-popping 193 per cent, almost twice as fast as Canadian prices.”
For more info on this, please click here.
