Will home prices slump or stagnate for a while?


MONTREAL – It’s now been a year or more since economists began forecasting a  slowdown, and maybe a slump, in the Canadian housing market, but thus far there  are only marginal signs that it’s happening.

Is this a good thing? Maybe not.

Whether you’re an optimist or a pessimist, there really is a wide range of  agreement that home prices are somewhat overdone in this country. If that’s  true, than it stands to reason that the longer prices rise, the more chance we  have of a significant downturn.

Referring to the prospects for future price moves, Scotiabank economist  Adrienne Warren said Wednesday that “we were in the relatively flat camp about  six months ago, but since then the picture has changed.”

Now, she and her colleagues believe, a slowing global economy and Canada’s  tightened mortgage lending rules have dimmed the outlook significantly. They’re  calling for a drop of roughly 10 per cent in average home prices over the next  two or three years.

This, of course, is just one view. Some other analysts are less worried.  Royal Bank economist Paul Ferley remains comfortable with that institution’s  prediction that home prices will be roughly flat next year.

Typically, an overvalued housing market comes back into balance gradually,  with prices remaining about flat while incomes rise enough to make homes more  affordable.

But once the overvaluation goes beyond a certain point – especially if  there’s some trigger, such as a big jump in interest rates or a recession that  squeezes employment and incomes – it is, indeed, possible to have a significant  drop.

Housing, Warren said, “is an asset that can sometimes have big movements, and  there’s a lot of emotion in real estate markets.”

And even though her bank’s view has moved to the more pessimistic end of the  spectrum over the last several months, Warren stresses that she’s not predicting  anything like the housing bust seen in the U.S.

This exceptional disaster has lasted six years, brought a collapse of more  than 30 per cent in the average price of a U.S. home and greatly worsened the  severity and length of that country’s economic downturn.

Indeed, there’s no recession at all in the outlook from Warren and her  Scotiabank colleagues, just rather weak Canadian economic growth next year of  1.8 per cent. Unemployment could actually edge down a bit from today’s 7.2 per  cent, she said.

One reason for this is that the Canadian housing slump, if it happens, is  likely to be concentrated in two very high-priced markets: Toronto and  Vancouver.

There’s a pretty good chance that if there really is a 10-per-cent drop in  Canada’s average home price, this average will be made up of bigger drops in  these two cities and relative stability elsewhere.

“The rest of the market is relatively balanced and healthier. With the  slowing in housing demand, its price trend should be more or less flat to  moderate declines,” Warren said.

With about 75 per cent of the housing market remaining healthy, the odds of a  serious economic shock remain small, particularly since Canada’s mortgage  lenders haven’t permitted most homeowners to become seriously overextended.  Homeowner equity in this country averages 67 per cent, for instance, far above  the 41 per cent average south of the border.

Indeed, the housing market could hold up significantly better than the  Scotiabank analysis predicts, depending partly on how the larger economy  performs.

A key reason why the Royal Bank’s home-price forecast is more optimistic is  that its economic forecast is more upbeat. Rather than the sluggish 1.8-per-cent  growth expected next year by Scotiabank, the Royal’s Ferley anticipates a  healthier 2.4 per cent pace. Even the Royal, however, warns that markets like  Toronto and Vancouver look somewhat vulnerable.

However, these markets are now showing substantial cooling, which could help  them correct with less distress.


© Copyright (c) The Montreal Gazette


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