Tag Archives: residential investment
By Ka Yan Ng – Reuters
Canada’s rapidly cooling housing market is robbing the nation’s economic recovery of one of its main drivers, but most industry watchers still think the once booming sector will avoid a U.S.-style crash.
Low mortgage rates, a healthy banking system and higher lending standards than in the United States are expected to support a market that saw double-digit price and sales gains in late 2009 and early 2010.
But many analysts and industry figures warn sales levels will slow, and property prices, at best, are likely to stagnate over the next 12 months.
“It was one of the key drivers of the recovery. We can’t expect that, in 2011, to continue. It gave us what it could and it doesn’t have anything else to give,” said Phil Soper, chief executive of Royal LePage Real Estate Services, one of the country’s largest brokers.
After taking a brief hit from the financial crisis, Canada’s housing sector broke away from the global trend and rebounded forcefully last year.
Bidding wars broke out for properties in Vancouver and Toronto, even as homeowners from Florida to California struggled to sell, or to abandon heavily mortgaged homes to their lenders.
With the bursting of U.S. and European property bubbles fresh in its mind, the Canadian government tightened lending rules earlier this year to cool the market.
Still, activity and prices heated up in the first half as buyers raced to avoid the stricter rules and new blended sales tax regimes introduced in two of the country’s biggest markets, Ontario and British Columbia.
Some transactions were also brought forward to sidestep anticipated interest rate hikes by the Bank of Canada, which tightened policy in June and July, and has also warned that residential investment will weaken.
“It brought forward some activity and now we’ve entered the payback period and so I’m not shocked,” said Robert Hogue, senior economist at Royal Bank of Canada.
“I don’t think the recent trends are a sign that a bubble had formed and a bubble is now bursting.”
LOST GROWTH DRIVER
Indisputably, the sector is cooling. Sales of existing homes fell nearly 25%, seasonally adjusted, in July from a year earlier, while the average home price was up a slim 1%, according to the Canadian Real Estate Association.
Bank of Nova Scotia recently declared that housing was “lost” as driver of growth after housing starts fell in July for a third straight month.
Talk of a U.S.-style housing crash was revived this week when the Canadian Centre for Policy Alternatives said the housing market was “an accident waiting to happen”. It predicted that in a worst case scenario, prices could fall more than 30% in some markets.
But that view was contradicted the same day by a report from another think tank. The C.D. Howe Institute argued that Canada’s housing policies would blunt the risk of a massive wave of defaults.
It noted tighter lending standards protected the Canadian housing market from the build-up of high-risk mortgage loans seen in the United States. It argued this should shield the Canadian market from the fate of its southern neighbor.
But an equally important factor for Canada’s housing market may be a bond market rally that has kept mortgage rates near historic lows. Bank of Montreal cut its five-year low-rate mortgage to 3.59% from 3.79% this week.
BETTER THAN U.S. ALTERNATIVE
Low rates may support the Canadian market, but few see much upside. David Rosenberg, who correctly predicted the U.S. housing downturn when he was a Merrill Lynch economist, said he expects Canada’s housing market to go through four to six quarters of extremely sluggish growth.
“That mini-housing boom was not what I would refer to as totally organic. All these policies and the expiry dates brought forward a tremendous amount of housing consumption,” said Rosenberg, chief economist at Gluskin Sheff & Associates.
“We’re paying the price for that distortion right now. We have to couple that distortion now with the reality that the economy broadly is going to be slowing down.”
Royal LePage’s Soper also sees stagnant prices over the next 12 months, but he said prices will return to a steady rate of appreciation, around 3%, after that.
“The real estate market in general should chug along nicely at about the same rate — which is not exactly exciting. But it’s much better than the alternative, which we saw south of the border,” he said.