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Canada’s House Prices Spike, But Economists Call It A ‘Soft Landing’

Canada’s House Prices Spike, But Economists Call It A ‘Soft Landing’.

The Huffington Post Canada  |  Posted: 03/17/2014 11:14 am EDT

house prices canada

Some economists are calling it a “soft landing,” because sales volumes have fallen and aren’t coming back up, but house prices in Canada showed no signs of easing up in February.

Prices for sales of previously owned homes jumped 10.1 per cent in the year to February, the Canadian Real Estate Association (CREA) reported Monday.

The average price for a re-sold house in Canada in February was $406,372, up from around $368,000 in February of last year.

But CREA trimmed its sales forecast for the rest of the year, noting that a slump in sales volumes isn’t showing signs of rebound. It now expects 463,000 sales this year, compared to 475,000 forecast in its December outlook.

TD economist Diana Petramala noted that the number of sales is down 9.3 per cent from its peak last August, and picked up by just 0.3 per cent in February.

Those are “signs of a soft landing,” Petramala wrote in a client note.

“The performance of Canada’s housing market over the last few months is largely reflective of a cooling in Canadian housing demand. Sales are moving at a pace that is neither too hot, nor too cold,” Petramala wrote.

She noted that the one thing that hasn’t happened is a slowing in house price growth, “but that too will likely come.” She says house prices are rising because of a shortage of supply in some cities, but that will be solved as new homes come online.

But she suggested prices of single-family homes could still keep going up.

“Most of the overbuilding occurred in the multi-unit segment of the market and will likely not help alleviate some of the supply constraints building in the more popular single-family home market,” Petramala wrote.

— With files from the Canadian Press

Canada's House Prices Spike, But Economists Call It A ‘Soft Landing'

Canada’s House Prices Spike, But Economists Call It A ‘Soft Landing’.

The Huffington Post Canada  |  Posted: 03/17/2014 11:14 am EDT

house prices canada

Some economists are calling it a “soft landing,” because sales volumes have fallen and aren’t coming back up, but house prices in Canada showed no signs of easing up in February.

Prices for sales of previously owned homes jumped 10.1 per cent in the year to February, the Canadian Real Estate Association (CREA) reported Monday.

The average price for a re-sold house in Canada in February was $406,372, up from around $368,000 in February of last year.

But CREA trimmed its sales forecast for the rest of the year, noting that a slump in sales volumes isn’t showing signs of rebound. It now expects 463,000 sales this year, compared to 475,000 forecast in its December outlook.

TD economist Diana Petramala noted that the number of sales is down 9.3 per cent from its peak last August, and picked up by just 0.3 per cent in February.

Those are “signs of a soft landing,” Petramala wrote in a client note.

“The performance of Canada’s housing market over the last few months is largely reflective of a cooling in Canadian housing demand. Sales are moving at a pace that is neither too hot, nor too cold,” Petramala wrote.

She noted that the one thing that hasn’t happened is a slowing in house price growth, “but that too will likely come.” She says house prices are rising because of a shortage of supply in some cities, but that will be solved as new homes come online.

But she suggested prices of single-family homes could still keep going up.

“Most of the overbuilding occurred in the multi-unit segment of the market and will likely not help alleviate some of the supply constraints building in the more popular single-family home market,” Petramala wrote.

— With files from the Canadian Press

Canadian Housing Markets To Decline 30%, Pimco Says

Canadian Housing Markets To Decline 30%, Pimco Says.

The house price correction that some market analysts have been predicting for Canada for years will begin this year, says the world’s largest bond fund.

House prices in Canada will fall as much as 30 per cent over the next two to five years, says Ed Devlin, head of Canadian portfolio management for Pimco, the trillion-dollar mutual fund run by high-profile billionaire Bill Gross.

I’ve been talking with clients and writing about how the housing market is overvalued,” Devlin told the Financial Times. “The change this year would be that I actually think it starts this year.”

But Devlin isn’t calling this a crash; he refers to it as a market “correction.” In a note published in January, Devlin said Canada’s housing markets won’t “burst” in a “disorderly manner” like the U.S. market, because Canada’s economic conditions are relatively stable.

Nonetheless, Canadian house prices are “stretched,” Devlin noted, and a cyclical correction back to more sustainable price levels is in the cards.

Not everyone agrees with this forecast, and whether or not Canada is experiencing a housing bubble has been the subject of heated debate among economists for several years.

But with prices hitting record highs and showing double-digit gains in some markets in recent months, more and more observers are growing worried that housing costs are growing unjustifiably high.

In a recent Reuters poll, 13 of 16 housing market analysts said they were “very concerned,” “concerned” or “somewhat concerned” that house prices could fall in Canada.

A recent Deutsche Bank survey named Canada as having the world’s most overvalued housing market.

But other observers argue Canadians can handle the high house prices, thanks to record-low interest rates that are making monthly payments more affordable than sticker prices would suggest.

Pimco’s Devlin doesn’t see those interest rates going up, but he does predict banks’ costs will rise, thanks to new regulations, and banks will pass on those costs to consumers.

One of those new rules was announced last week, when Canada Mortgage and Housing Corp., the government-run mortgage insurer, announced it is raising the premiums it charges for insuring mortgages by 15 per cent on average. Those new premiums will be reflected in higher borrowing costs for consumers who borrow more than 80 per cent of the value of their house.

A divide has opened up between domestic observers of the Canadian housing market — who tend to favour the view that Canada’s housing market remains healthy — and foreign observers, who appear much more concerned that Canada’s decade-long run of house price increase could end in disaster.

Bets against Canadian banks and the loonie have been hitting record highs over the past year. Those who bet against Canada’s banks have so far been losing, as their earnings have held up.

But those who bet against the loonie have been more successful; the currency has lost about 10 per cent of its value against the U.S. dollar over the past year, with about half that decline taking place since the start of the year.

Canada Housing Crash Feared Among Analysts: Reuters Poll

Canada Housing Crash Feared Among Analysts: Reuters Poll.

 Posted: 02/26/2014 1:06 pm EST

canada housing crash

Canada’s real estate market may be resting on a house of cards, say experts in aReuters poll.

The news agency surveyed 16 housing experts and almost all of them are worried that prices could fall sharply after a decade of rapid growth.

Three said they were “very concerned,” two said they were “concerned” and eight said they were “slightly concerned.” Three said they were not concerned at all.

However, the analysts also didn’t believe that a housing crash would happen any time soon. In fact, prices are expected to rise 2.2 per cent this year, one per cent in 2015 and 0.8 per cent in 2016, Reuters reported.

“Outside of Toronto and Calgary, the housing market is largely cooling, though far from crashing,” Sal Guatieri, senior economist at BMO Capital Markets, told the agency.

Concerns about a housing crash arise amid positive signs for the country’s real estate market. The average price of a Canadian home rose between 1.2 per cent and 3.8 per cent in the fourth quarter of 2013, said a Royal LePage survey.

But the market also remains vulnerable, as prices could fall by as much as 25 per centdue to spiking interest rates or an “economic shock,” a TD Bank report said earlier this month.

The report by economist Diana Petramala found that Canadian housing is massively overvalued — by 60 per cent compared to rental rates and by 30 per cent compared to people’s income.

However, the report also said that much of the imbalance in the market reflects “frothier conditions in the larger urban centres of Toronto and Vancouver.”

Bank of Canada Governor Stephen Poloz warned in early January that long-term interest rates could rise in response to tapering by the U.S. Federal Reserve, though he also did not appear in any hurry to hike them.

TD Bank: Housing Slowdown Could Send Prices Down 25%

TD Bank: Housing Slowdown Could Send Prices Down 25%.

house prices canada

Canadian housing is overvalued by some 10 per cent, but a spike in interest rates or an “economic shock” could send prices spiralling down as much as 25 per cent, TD Bank says in a new report.
Canadian housing is overvalued by some 10 per cent, but a spike in interest rates or an “economic shock” could send prices spiralling down as much as 25 per cent, TD Bank says in a new report.

Yet “much of this imbalance appears to reflect frothier conditions in the larger urban centers of Toronto and Vancouver,” the report says.

TD economist Diana Petramala noted in the report that, when looking at house prices compared to rent or income, Canadian housing is massively overvalued — by 60 per cent compared to rental rates, and by 30 per cent compared to people’s incomes.

Those numbers agree more or less with estimates from The Economist, the OECD and Deutsche Bank, which last fall declared Canada’s housing to be the most overvalued among two dozen countries it surveyed.

But TD says those numbers are missing the point, because what matters is not house prices compared to rent or even income, but rather people’s ability to pay.

Thanks to record low interest rates, people are able to make much larger mortgage payments than those stats would suggest. So how much housing is actually overvalued depends on where interest rates are headed.

If interest rates go back to their historical norms, housing is overvalued by about 25 per cent, TD Bank estimates. But if they stay where they are, housing is actually undervalued — by about six per cent.

But interest rates are neither likely to go back to their historical norms (there’s been a downward, long-term trend for the past three decades), nor are they likely to stay as low as they are.

TD expects interest rates to rise nine-tenths of a percentage point by the end of 2015. If that happens, housing is overvalued by 10 per cent, and this is TD’s likeliest scenario, suggesting a correction, and not a crash, is in the cards. But even a relatively small correction in prices could send the market tumbling if it’s accompanied by weakness in the economy.

“In this case, housing activity can undershoot fundamentals. For example, if prices are 10 per cent overvalued, they could still potentially fall by 25 per cent if triggered by a spike in interest rates or a negative economic shock,” the report says.

Strengthening TD’s argument is a new report from the IMF, released Monday, whichalso estimates house prices in Canada to be overvalued by about 10 per cent.

Yet the long-expected correction is slow in coming. Even though home sales have stagnated in recent months, prices were still solidly up (by nearly 10 per cent) in the final months of 2013, and Canadians’ household debt continued to reach new record highs.

That debt burden is worrying TD Bank’s CEO, Ed Clark, who has been warning in recent public speeches that overextended consumers are making Canada’s economy “fragile” and ‘accident-prone.”

We’ve learned around the world that when you make the consumer indebted like that, their ability to withstand shocks is dramatically less,” Clark said.

He also worries that persistently high house prices could harm Canadians. Canadians will either end up spending a larger part of their income on housing, reducing their quality of life, or they will push wages higher, making Canadian labour less competitive in the global market, Clark argues.

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