Housing boom will bust

poll: Fears of financial woe if prices fall and interest rates jump 

tOrOntO — Canada’s housing boom will grind to a halt next year, stopped by price declines in the condominium-saturated mar- kets of Toronto and Vancouver, according to a Reuters poll, rais- ing the risk of a broader economic slowdown.

On a national basis, Canadian house prices are expected to rise two per cent this year before stall- ing next year with a negligible 0.5- per-cent gain, according to medi- an results of the poll, which was conducted last week.

House prices have increased 37 per cent since their trough in Janu- ary 2009, the Canadian Real Estate Association index showed. All 15 respondents in the poll said the market was expensive, by varying degrees.

“Home prices are overvalued by slightly under 10 per cent nation- wide [and] most of the overvalu- ation is concentrated in Toronto and Vancouver,” said Mark Hop- kins of Moody’s Analytics, citing a common concern about the two hottest urban markets.

Toronto house prices are expect- ed to rise 6.6 per cent this year after rising almost 10 per cent in 2011. But that will quickly fizzle into a decline of 0.2 per cent next year, the first fall since 2008.

In Vancouver, the country’s most expensive market and until recent- ly clocking the fastest annual price rises, they are expected to fall 1.6 per cent this year and 2.5 per cent in 2013.

Canada’s housing market avoid- ed the U.S. sub-prime boom and bust that triggered the glob- al financial crisis, in large part because its banks are more close- ly regulated and more conserva- tive, requiring higher deposits for mortgage lending.

While property prices tumbled in the U.S., Ireland, Spain, and to a lesser extent, Britain, record low borrowing costs that followed the recession spurred another wave of home buying and property market speculation in Canada.

By early 2010, sales volumes and prices were rising by double dig- its on an annual basis. Figures from one industry group showed that since March 2009, the nadir of the financial crisis, Canada home prices have risen by nearly a third. While the housing boom helped pull the country out of a shallower recession much fast- er than the U.S., it has also fuelled fears a major correction could be in the offing.

Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have both expressed concern with the high debt loads Canadians have taken on to finance house purchases, enticed by rock-bottom interest rates.

Household debt levels are approaching those in the U.S. before the housing meltdown there, where prices fell by more than a third and still have not shown meaningful signs of recov- ery. Canada’s credit market-debt- to-income ratio hit a record 152 per cent in the first quarter of 2012.

Some economists, like Bricklin Dwyer at BNP Paribas, worry that Canada’s economy, which has outperformed its peers in the G7, could take a big hit if the housing market were to turn suddenly

“Whether or not Canada will face a hard landing will be deter- mined by whether or not house- hold risk was correctly priced in the first place,” Dwyer said. “In other words, when Canadians show up to refinance their mort- gages, if their interest rates jump and/or the terms of their loans change dramatically, then house- holdscoulddefaultatarapidrate,” Dwyer said.



cameron french - reuters 

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