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Tag Archives: collapse

Canada home prices seen falling, but not crashing

Andrea Hopkins – Reuters

Canadian housing prices will fall 10% over the next several years and home building will slow sharply in 2013, but the country’s recent property boom is not expected to end in a U.S.-style collapse, according to a Reuters poll.

Comment: That is a national prediction, not a local one for Toronto. With Vancouver dropping like a stone, it is easy to see how average prices could fall. But when something like 14 of 15 major centres are seeing price increases, I am not so sure where is drop is going to come from.

The survey of 20 forecasters published on Friday showed the majority believe the Canadian government has done enough to rein in runaway prices, preventing the type of crash that has devastated the U.S. market for years.

“This isn’t a sharp correction, this isn’t a U.S.-style correction, it’s just simply an unwinding of the excess valuation that was created by artificially low interest rates for a long period of time,” said Craig Alexander, chief economist at Toronto-Dominion Bank.

“I would emphasize that while a 10 % correction sounds scary, in actual fact, this would be a healthy outcome.”

U.S. house prices crashed as a mortgage crisis unraveled in 2008, triggering a financial crisis and leaving a trail of foreclosures, negative equity and financial hardship for millions of people. Housing prices in the U.S. have only begun to rise again this year.

On a national basis, Canadian house prices are expected to drop 10% over the next several years, and housing starts will fall more than 17% to 184,000 units by mid-2013, according to median results of the poll, which was conducted over the last week.

House prices have already begun to cool in some areas but nationally remain 23% higher than their trough in March 2009, according to a Canadian Real Estate Association index.

Comment: And this 10% is to happen over a few years. Right now we are up over last year, yet again. So let’s say we start from around 25% up from 2009, then in a few years, say 2016, then we are down 10% but still UP 15% over 2009. Explain to me how this is a bad thing.

Respondents in the Reuters poll said house prices will rise 2.0% in 2012 and fall 0.1% in 2013, according to the median of 18 forecasts, putting most of the losses at least two years away.

Comment: How do they predict a price drop while predicting prices are going UP an average of 1.9% in 2012-2013?

Median forecasts had Toronto prices rising 5.1% in 2012 and falling 1.3% in 2013. But respondents saw an eventual 5% fall from current levels. Vancouver prices were forecast to fall 2.7% in 2012 and 3.8% in 2013, with an eventual decline of 12.5%.

Comment: If Toronto prices fall at all in 2013 I will eat this blog.

As sales decline and prices fall, home builders will ratchet back on construction starts, the poll showed.

Housing starts, which notched a seasonally-adjusted annual rate of 222,945 units in the third quarter, will decline to 200,500 in the fourth quarter, 186,900 in the first quarter of 2013, and 184,000 in the second quarter of next year.

BITE OUT OF GROWTH

That 17.5% drop in new home building will take a bite out of Canada’s economic growth, fueled by the housing sector, consumer spending and government stimulus since growth slowed in 2009. But a strengthening global economy should help pick up the slack, Alexander said.

Not everyone is as sanguine. While economists at Canada’s major banks have consistently predicted a softening in prices and a slowing in housing starts, some independent analysts see a very hard landing ahead.

“The housing market is something to be very worried about,” said David Madani, Canada economist at consultancy Capital Economics in Toronto.

Madani, whose forecasts are included in the Reuters poll, has consistently predicted a 25% drop in prices and a plunge in housing starts to just 150,000 next year as builders grapple with too many homes and falling demand.

Comment: He has consistently predicted it and it has consistently NOT happened. I fact, prices rose 5-8% in the face of that “prediction”.

“The one symptom that housing bubbles always have in common is the over building, and I feel the banks play this down a bit,” said Madani, pointing to recent housing starts well above the 175,000 to 185,000 pace economists say is needed to keep up with population growth.

Comment: No one has yet been able to explain to me how the 5.5% annual price increase over the past 10-15 years is a bubble. How is that the same as the 127% jump of the late 1980s? Or the 60,000% jump in 6 months during the original bubble, the Dutch Tulip Mania? Prices in Toronto have not risen as much since 1996 as they did from 1987-1990.

“We’ve been building above 200,0000 for several years. And we know we’ve been building above demographic requirements because the evidence is in the inventory data – it’s high, it’s not low,” said Madani.

“The excesses are there, it’s plain and clear to see.”

Comment: What? We have nowhere near enough housing for the demand! That is why 100s of new condo sales centres move 80% or more of their units before shovels hit the dirt. We have bidding wars on rentals! We have investors crying because new condos are down 30% this year. With 100,000 people coming to the GTA every year, they need somewhere to live. Even with 200,000 starts NATIONALLY, we need fully half that in Toronto alone to satisfy demand. These are all real numbers, real data you can check for yourself. What does Capital Economics have but for a desire to get their name in the news?

Still, all 15 respondents who answered an additional question said they believe the Canadian government has done enough to slow the housing market and prevent a U.S.-style crash, as Finance Minister Jim Flaherty has argued.

RULE CHANGES HURT

Mindful of the U.S. boom and bust, the federal government tightened mortgage lending rules four times in the last four years to make it harder for home buyers to take on too much debt in their quest for a home.

The rule changes gradually shorted the maximum mortgage length from 40 years to 25 and also put limits on how much homeowners could borrow against their house, among other measures.

While interest rates are not expected to rise until mid-2013, the stiffer lending rules and government warnings about the high debt loads of Canadian households have helped cool the ardor of home buyers, with the hottest markets, including Vancouver and Toronto, already feeling a chill.

Sales of existing homes were down 15.1% in September from a year earlier, and were 6.5% lower in the third quarter from the previous three months, according to data from the Canadian Real Estate Association.

Prices, which lag sales, have started to come down as well. Prices for existing homes dipped 0.4% in September from August, according the Teranet-National Bank Composite House Price Index, but remain 3.6% higher than a year earlier.

Comment: You cannot compare month to month, as there are naturally yearly cycles with some months higher and some months lower. You can only compare the same month in different years.

Prices of new homes rose 0.2% in the month, the 18th straight monthly gain, and were up 2.4% on the year, according to Statistics Canada.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.

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