Realtors to Canadians: Chill out

Posted on 27. May, 2010 by in News

Steve Ladurantaye Real Estate Reporter

Globe and Mail Update Published on Wednesday, May. 26, 2010 2:25PM EDT

There will be no drastic drop in Canadian housing prices, the Canadian Real Estate Association said Thursday, because house prices will stabilize and climbing household income will make owning a home more affordable.

Responding to reports from some of the country’s largest banks that prices could see drops of as much as 10 per cent in the next two years as higher mortgage rates and rising prices make housing more expensive, the association said the naysayers are ignoring the cyclical nature of Canada’s real estate market.

“The relationship between average price and income has recently been cited as portending a U.S.-style correction in Canadian home prices,” said the association’s chief economist Gregory Klump. “However, such warnings ignore the longer-term relationship between prices and income, and disregard typical Canadian housing market cycle dynamics.”

The housing market has been key to Canada’s recovery, with average prices up 23 per cent from their recessionary lows at the end of April. The average price of a home at the end of April was $344,968, the highest on record and 7 per cent higher than before the recession.

In a report Tuesday, CIBC economist Benjamin Tal said his analysis showed that 17 per cent of Canadian homes had overshot their “fair value” by as much as 14 per cent by the end of April. He said there wasn’t the imminent threat of a crash, but warned prices could drift as much as 10 per cent lower in the next two years as more supply comes onto the market.

“The house market is overshooting, that’s a given,” he said in an interview. “The market is already responding, supply is increasing very quickly and the market is correction itself. That is much different than a panicked crash.”

TD Bank recently suggested prices could fall by 2.7 per cent in 2011. The Canadian Real Estate Association’s own forecast suggests a decline of 1.5 per cent by the end of next year. Only the Canada Mortgage and Housing Corp. calls for higher prices in 2011, with an anticipated gain of 1.3 per cent.

However, Mr. Klump said worries have been blown out of proportion because Canada’s market has always been characterized by periods of sharp growth followed by periods of relative inactivity. By contrast, he said, incomes tend to climb over time giving home owners a chance to catch up to higher prices.

“The Canadian housing market is now widely thought to be at, or very near, the top of a cycle, and the ratio of home prices to incomes is currently high. This ratio will revert to its long-term average as it always does as part of a normal housing market cycle,” he said.

“History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again.”

The association – which represents about 100,000 real estate agents, provided a list of reasons it believes a sharp correction is unlikely:

– The “vast majority” of Canadians have mortgages they can afford;

– Sixty-six per cent of mortgages have terms of at least five years;

– A “substantial” percentage of mortgage holders have switched to fixed rate mortgages to avoid interest rate sensitivity. Those with variable-rate mortgages “tend” to have higher incomes;

– Over the past 12 months, most new mortgages (64 per cent) have amortization periods of 25 years or less. This is an increase compared to 54 per cent one year ago;

– Twenty five per cent of mortgage holders recently increased their home equity via lump sum payments against the principal and/or by increasing the amount of their mortgage payments above their scheduled payment;

– Most mortgage holders (77 per cent) have a home equity position of at least 25 per cent;

– Job losses incurred during the recent recession “are the primary cause of the recent rise in mortgage arrears. With employment having stabilized, the arrears rate has likely reached its cyclical peak.”

“Canada is widely believed to soon enter a typical demand-driven housing downturn due to recent price increases and an expected rise in interest rates. While an unexpected spike in interest rates is always possible, rates are most likely to rise at a measured pace during a new era of fiscal restraint,” Mr. Klump said.

“Canada’s solid mortgage market trends, conservative lending practices, and prudent borrowing by home buyers means that Canada will avoid a U.S.-style housing price correction.”

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