Canada’s Housing Market Update – October, 2008

November 18, 2008

Over the next eight to ten months, a gradual slide will likely send the average price of a home in Canada lower by another 5 to 10 per cent, says economist Benjamin Tal.

Sales activity will also drop by an average of about 20 per cent from current levels before stabilizing near the end of 2009, Mr. Tal, senior economist at CIBC World Markets Inc., said in an interview after his speech Tuesday before an income fund industry conference.


By this time next year the market will level off as conditions in the Canadian economy stabilize, he said. However Canadians shouldn’t be waiting for a “V-shaped recovery,” at that point, but instead should expect both home prices and sales to remain relatively flat, he added.

“What we are saying is that prices will continue to ease in the coming months, but there will be no U.S.-style freefall,” Mr. Tal said.

Canada should be in buyers’ market territory by late 2008 or early 2009 for the first time since 2001, he added.

Some cities have already been feeling the slowdown in home sales and prices harder than others, such as Windsor, Ont., which has suffered as a result of the auto sector slump. Cities in Alberta have also experienced deeper and earlier price declines than many other parts of the country, mostly due to prices that seemed to double “over breakfast,” Mr. Tal said.

In June, the average resale home price fell year-over-year for the first time in more than nine years, according to the Canadian Real Estate Association (CREA). Prices slipped further in the next two months, and the same trend will likely be repeated when September numbers are released next week.

In the West, it’s likely some cities will see double-digit price declines by the end of 2009, particularly in Alberta and Saskatchewan, Mr. Tal said. However, the declines will bring Canada back to a market that still has healthy sales and price levels, he added.

The cool-down is unlikely to wipe out all of the gains made during the six-year boom, he said. In Regina, for example, home prices have risen by up to 40 per cent in one year, according to a report this week by brokerage Royal LePage Real Estate Services. In the third quarter, the price of a detached, two-storey home there hit $259,000 compared with $185,500 the year before, the report said.

In Ontario, where prices have risen at a more moderate pace, home values could fall by an average of about 5 per cent from their current level by this time next year, Mr. Tal said.

As home prices continue to fall, mortgage rates are on the rise, with banks passing on their higher borrowing costs to consumers. While mortgage rates are still near historically low levels, the increase is fuelling worries that debt-laden Canadians could be in danger of tumbling into a U.S. style housing crisis.

The concern is heightened by the fact that some existing mortgages are zero-down, 40-year amortization products, which have extended some home owners to their financial limits.

A government lending clampdown aimed at averting a U.S.-style housing bubble will virtually eliminate these products from the market for new and renewing mortgages as of Oct. 15.

Despite these concerns, economists said Canada’s housing market is unlikely to mirror what’s happened in the United States.

An estimated 20,000 to 25,000 Canadian home owners are currently in arrears, said Will Dunning, chief economist at the Canadian Association of Accredited Mortgage Professionals (CAAMP), in a report released Monday.

This means about 0.3 per cent of Canada’s 8.05 million home owners are behind on their mortgages by three months or more, he said.

By contrast, arrears in Canada hit about 0.7 per cent in 1992, as the effects of the housing bubble in the late 1980s and early 1990s worked their way through the mortgage market, Mr. Dunning said.

Even if there are some job losses in Canada due to the global financial slowdown, the number of mortgages in arrears is unlikely to rise to anywhere near to the 1992 level because interest rates remain so low, Mr. Dunning said.

The closest comparison to Canadian arrears levels in the United States are 90-day mortgage delinquencies, Mr. Tal said. They are now in the 2 to 3 per cent range, meaning that about 1.5 million U.S. home owners are currently in delinquency.

In August, the last month for which data were available, one in every 416 U.S. households received a foreclosure filing, a 12 per cent increase from July and a 27 per cent increase from August, 2007.

National foreclosure statistics aren’t available in Canada, but lenders say the rate is low, and hasn’t shown an appreciable increase over last year.

At 70 per cent, the equity Canadians have in their homes has also been increasing over the past decade, while in the United States that level has slipped to below 50 per cent, Mr. Dunning said.

The U.S. housing collapse was a crisis brought on by overuse of subprime mortgages. Thus, Mr. Tal said, it’s important to remember that its peak risky mortgages made up 5 per cent of the market in Canada, compared with 33 per cent in the U.S.

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