FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 25 November 2015

A Reckoning For Canadian Housing?

by Chad Fraser, Investing Daily

Investing Daily Article of the Week

Another month, another big jump for Canadian house prices.

According to just-released figures from the Canadian Real Estate Association, average resale prices rose 8.3% in October from a year earlier, to nearly CAD454,976. As always, Vancouver and Toronto led the way, with gains of 15.3% and 10.3%, respectively.

However, two new reports suggest the market's hot streak may be headed for a cool-down, at least in the country's two priciest cities.

The first came from the Organization for Economic Cooperation and Development (OECD), which had pointed words concerning house prices in the country's biggest city on Nov. 9, when it released a report stating that:

"newly completed but unoccupied housing units have soared in Toronto, increasing the risk of a sharp market correction."

However, the organization did note that in Toronto,

"economic activity has been relatively buoyant and demand by foreigners has been boosted by the low Canadian dollar."

Overvaluation, Foreign Buyers Heighten Concerns

A few days before the OECD weighed in, the Canada Mortgage and Housing Corp. released its quarterly survey, saying it had detected moderate signs of overvaluation in 11 of 15 major markets, with strong signs in three: Toronto, Montreal and Ottawa.

But in all, the CMHC said just four markets showed strong evidence of "problematic conditions": Toronto, Saskatoon, Regina and Winnipeg. (The agency bases this judgment on not only overvaluation but also factors like overbuilding and price acceleration.)

Hanging over Canada's real estate concerns is the participation of buyers from outside the country. That can be a plus, as the OECD pointed out, but how these investors would respond to a slowdown is an open question.

CMHC president Evan Siddall said in a Nov. 12 CBC article:

"While both domestic and foreign investment activity can be speculative, foreign investment may be more mobile and subject to capital flight. This would increase volatility in domestic housing markets."

What's more, the size of the foreign contingent is anyone's guess: the government doesn't keep track, though Prime Minister Justin Trudeau promised to look into eroding affordability during the recently completed election campaign: "If there are issues of speculation, then yes, the federal government has the tools to step in," he said in a Sept. 9 CBC article.

A Market Divided

As we said in the June issue of Canadian Edge, it's important to keep in mind that just because a market is overvalued doesn't necessarily mean a quick correction is in the cards, as overvaluation can continue for a long time and isn't always enough on its own to trigger a price drop.

Another thing to note is that the Canadian real estate market is more than a tale of two cities: if you strip Vancouver and Toronto out of the October sales figures, Canadian house prices rose a much more moderate 2.5%, to CAD339,059.

And despite its overvaluation concerns, the CMHC's latest forecast points to a soft landing, with the average price of an existing home rising 7.2% this year but the pace of gains slowing to 1.3% next year and 1.4% in 2017.

That largely jibes with the view of Bank of Canada (BoC) senior deputy governor Carolyn Wilkins.

She told The Globe and Mail on Nov. 13:

"Our base case, and one that we outlined in the [October monetary policy report], is that the housing market and household debt are going to evolve in a constructive way. We don't see the risk as part of our base case at all."

She added.

"We see strengthening growth in Canada that's coming from the US, from past monetary policy easing and also from the lower dollar."

Something else that's absent from the Canadian real estate story: large numbers of subprime borrowers. Despite the ongoing rise in home prices, just 0.27% of Canadian mortgages are currently in arrears, according to the Canadian Bankers' Association.

Market Will Be Tested: Economist

Of course, none of this is to say the risk of a Canadian housing correction should be dismissed. Even though there are few signs of a bubble outside Toronto and Vancouver, those two markets are home to about a quarter of Canada's population, so a sharp correction in one or both would have a knock-on effect for the broader economy.

But you have to go beyond the headline numbers, says CIBC deputy chief economist Benjamin Tal.

He said in a Nov. 9 BNN interview.

"The OECD and others are looking at the headline numbers, and they jump to conclusions. If you look at population growth in Canada, Canada is not overbuilding. At 190,000 units a year, that's more or less in line with population growth."

Tal thinks rising interest rates will be the real test for Canadian housing, particularly following the extended period of low rates the country has experienced. Higher rates could also pose a challenge for consumer spending in the years ahead as Canadians pay more to service their mortgages.

The BoC, for its part, isn't expected to make any upward moves anytime soon, regardless of what the Federal Reserve does (or doesn't do) in December.

Tal said:

"This test will be maybe a 2017 story. If interest rates don't rise very quickly, it will be more of a gentle slowdown as opposed to a crash."

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

Econintersect Investing

Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2018 Econintersect LLC - all rights reserved