Housing prices and sales to slow, CMHC says
Julie Fortier and Kim Covert, Financial Post · Tuesday, Aug. 31, 2010
OTTAWA — Expect to see home sales and prices fall in Canada the second half of 2010, while housing starts moderate, according to Canada Mortgage and Housing Corporation’s second quarter Housing Market Outlook released Tuesday.
“Existing home market conditions will remain balanced over the next two years as (multiple listings service) sales ease and inventory levels remain elevated,” the report said. CMHC forecast existing home sales will be in the range of 450,000 to 485,700 units in 2010, with a forecast of 463,800 units. In 2011, MLS sales will move lower and are expected to be in the range of 425,000 to 490,700 units, with a forecast of 456,000 units.
The average MLS price is expected to “edge lower” through the end of 2010 and then rise modestly in 2011.
Housing starts are expected to be in the range of 170,200 to 198,400 units in 2010, with a forecast of 184,900 units, according to the report. In 2011, housing starts will be in the range of 146,900 to 210,500 units, with a forecast of 176,900 units.
The forecast is roughly in line with what other Canadian real estate forecasts have been predicting with stricter mortgage rules, harmonized sales tax introduced in Ontario and British Columbia and higher interest rates taking affect in the second half of 2010. Existing home sales have already plunged 11% between June and July 2010 and have fallen 31% year over year, the Conference Board said in a report Friday.
A drop in housing prices would mitigate fears expressed in a report released Tuesday by the Centre for Policy Alternatives, which warns there are bubbles hanging over six of Canada’s hottest real-estate markets — Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal — that could burst if steep housing price increases collide with a sharp gain in mortgage rates.
“The hottest six real-estate markets could be in for a correction at best or, at worst, a bubble burst,” writes David Macdonald, author of the report. “Rate setters at the big banks are in the driver’s seat now as mortgage rates inch up. They need to hit the brakes lightly.”
The chief concern is that price increases in those markets are outside the “historic comfort level” — the average, inflation-adjusted house price in the cities has historically held stable at between $150,000 and $220,00 in today’s dollars. But the current average price in all six major markets now is over $300,000, the report said, as price increases have exceeded the growth in inflation, household incomes and economic growth.
A C.D. Howe report released Tuesday concludes, however, that Canada will not experience the kind of dramatic housing bust that occurred in the U.S.
In the report, Jim MacGee, an associate professor of economics at the University of Western Ontario in London, Ont., suggests that the “decline in underwriting standards played an essential role” in the bottom falling out of the market south of the border. It’s a situation that simply doesn’t exist in Canada, Mr. MacGee says.
Not only does Canadian government policy discourage lenders from building up large numbers of high-risk loans, he says, and the fact that non-bank lenders have found it more difficult to raise funds in the wake of the subprime crisis in the U.S. means that many have stopped underwriting sub-prime loans in Canada.
“The small number of high-risk loans underwritten suggests that the modest decline in Canadian house prices predicted for 2011 (TD Economics 2010) is very unlikely to trigger a U.S.-style surge in foreclosures,” Mr. MacGee writes.
“Canadian housing policies, which avoided the sharp decline in underwriting standards seen in the U.S., worked well in reducing the possibility of a housing bust in Canada during 2008-2009, and continue to mitigate the risk of a massive wave of defaults in the future.”
He adds that policy-makers would do well to “recall the lessons of the 2008-2009 experience” when they are once again pressured to relax underwriting standards.
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