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.