Conflicting predictions of the Canadian housing market

homeThe CMHC on Tuesday predicted that housing starts in Canada should rise moderately this year, while two research groups, the CCPA and the CD Howe institute have both examined the possibility of a housing bubble in Canada.

Canada Mortgage and Housing Corp (CMHC) said in its outlook that it expects housing starts of 184,900 units in 2010, slightly ahead of its May outlook for 182,000 units.

There were 149,081 starts in 2009.

For 2011, CMHC forecasts 176,900 starts, down slightly from the 179,600 it forecast in May.

For the existing-home market, CMHC chief economist Bob Dugan forecast 450,000 to 485,700 resales in 2010, with a specific prediction of 463,800. For 2011, he sees 425,000 to 490,700 resales, with a specific forecast of 456,000.

CMHC did not provide a forecast for an average price but said it would “edge lower” through the end of this year then rise modestly in 2011.

The CMHC forecast follows data earlier this month that showed housing starts fell for a third straight month in July, while sales of existing homes fell 6.8 percent in the same month, offering further evidence the recently hot housing sector is no longer playing a starring role in the economic recovery.

The recent data, which followed the implementation of stricter lending rules and higher interest rates, has deflated talk of a housing market bubble.

But on Tuesday, the Canadian Center for Policy Alternatives (CCPA) released a report saying there is still a risk of a housing bubble in six markets.

After examining trends in home prices in Toronto, Ottawa, Vancouver, Calgary, Edmonton, Montreal, between 1980 and 2010, the independent research group found price increases in those cities were “outside of a historic comfort level”.

“The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen,” says the report’s author, David Macdonald, a CCPA research associate.

In a worst-case scenario, the report predicted homeowners in Edmonton and Montreal could be hardest hit, losing 38 percent and 34 percent, respectively, of their property value in under three years. Vancouver homeowners would be hit worst by dollar value, losing almost C$200,000 ($187,793).

The think tank found that house prices tended to hover within a narrow range of between 3 and 4 times the annual median income in the relevant province, before 2000. Currently, home prices are 4.7 to 11.3 times the median income, the CCPA report said.

Another think tank, the C.D. Howe Institute found that national housing policies have “worked well” and should help mitigate the risk of a massive wave of defaults in the future.

“To evaluate the likelihood of a U.S.-style housing market crash in Canada, one first needs to understand what caused the U.S. housing boom and bust,” Jim MacGee, an associate professor of economics at the University of Western Ontario, wrote in the C.D. Howe report.

Tighter underwriting standards were a main factor that has protected the Canadian housing market, compared with the United States, which saw high-risk mortgages eventually lead to a rapid increase in foreclosures, the report argued.

“This difference in government policy has helped to discourage the build-up in Canada of a large number of high-risk mortgage loans,” the report said, adding that policymakers would be well-served to remember these lessons should “pressures to relax underwriting standards reoccur in the future.”

2 Comments to "Conflicting predictions of the Canadian housing market"

  1. July 29, 2011 - 11:46 pm | Permalink

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  2. December 17, 2011 - 7:55 am | Permalink

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