Canada’s housing bubble has vanished without a ‘crash landing’, say economists

Economists say the Canadian housing bubble — long feared to be vulnerable to a dangerous pop — is now officially dead

Jonathan Ratner | August 16, 2017 12:32 PM EDT

Don’t count on the Bank of Canada to change its course of gradually higher interest rates because the housing market is weakening. After all, that’s what policy changes, particularly in British Columbia and Ontario, were put in place to do.

“(The bubble) has ceased. It has expired and gone to meet its maker”

The Canadian housing bubble — long feared to be vulnerable to a dangerous pop — is no more.

“It has ceased. It has expired and gone to meet its maker,” said Douglas Porter, chief economist at BMO Capital Markets, parroting a famous Monty Python quote. “This is a late bubble. Bereft of life, it rests in peace.”

Canada’s housing market corrected for a fourth consecutive month in July, led by the cooling in Ontario. Yet the declines appear to be moderating, as the 2.1-per-cent monthly drop in nationwide home resales marked a significant moderation from the 6.4-per-cent average rate of decline in the previous two months.

“Housing market developments in July are consistent with our view that Canada’s market is in the process of moderating to a more sustainable level of activity,” said Robert Hogue, senior economist at RBC Capital Markets.

“Much of the ongoing cooling is taking place in Ontario where recent policy changes by the provincial government have contributed to a welcome shift in market psychology toward more caution.”

Hogue acknowledged that the dramatic drop in Greater Toronto Area home resale activity during the past four months doesn’t look like a soft landing, as the 44-per-cent (seasonally adjusted) dip since March is not far from the 48-per-cent plunge seen between December 2007 and December 2008.

However, the economist doesn’t think a “crash landing” is playing out. Instead, he believes the GTA’s market correction is now overshooting.

Meanwhile, data for July provides more evidence that the Vancouver-area housing market isn’t overheating again.

Hogue pointed to the third consecutive monthly decline (1.7 per cent) of home resales, along with a dip in the sales-to-new listings ratio for four of the past five months.

“… We expect any further increase to be modest in the short term as the market stays close to balanced conditions,” Hogue said.

As more stringent mortgage regulations and rising mortgage rates hold back demand across much of Canada, there is little reason to think the country’s central bank is all that worried.

TD Bank economist Diana Petramala expects the Bank of Canada to hike rates three times in the next 18 months, so mortgage rates should continue to trend higher.

“As such, housing affordability is likely to deteriorate broadly across Canada,” she said, adding there are few signs that foreign investment or speculation has shifted to areas outside of Ontario after the implementation of a non-resident buyer’s tax in the province.

Despite the GTA’s supply increase that has caused a sharp market rebalancing, Petramala expects the market will undergo a soft landing.

The economist believes GTA home prices could fall about six per cent on an annual basis in 2018.

In other markets, she anticipates price growth between two and four per cent, which is below the six-per-cent average of the past 15 years, but consistent with income growth and rising mortgage rates.

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc., characterized the softening Canadian housing markets as “very orderly,” despite his view that the “bubble has been popped” in Toronto and the surrounding area.

He believes that if the GTA’s declines match what occurred in Vancouver, the correction will probably last little more than a year, “and prove to be a healthy environment (outside of those who bought at or close to the peak.”

Rosenberg also noted that sales activity is up in non-bubbly areas such as Ottawa, Quebec City, Winnipeg, Edmonton, Regina and Hamilton.

As a result, he believes the suggestion that 20 per cent of the Canadian housing market will hurt the banks when the other 80 per cent is in good shape is somewhat ridiculous.

“The banks lend nationally, not regionally, and nationally what we have on our hands is a nearly perfectly balanced market,” the economist said, pointing to the sales-to-new listing ratio of 53.5.

The housing market slowdown will take a bite out of bank earnings, but Rosenberg is confident it is already priced into their stocks. He also sees no reason why this will turn into a credit event.

“There’s no canary in the coal mine here and this is not the same orbit as the U.S. in 2006-07 when it was truly a national bubble,” the economist added.


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