Canada's housing market is overvalued and flooded with supply, say economists at Bank of America Merrill Lynch in a report that warns prices could fall five per cent in the first half of 2012.
"We estimate the housing market nationwide is about 10 per cent overvalued," says the report, published Monday by economists Ryan Bohren and Sheryl King.
Their report says Canada remains somewhat shielded from the economic fallout of the European debt crisis but is certainly not "impregnable," particularly if unemployment approaches eight per cent.
"In our view, the housing market is one of the most vulnerable sectors to this weakening economic environment, showing classic signs of overvaluation, speculation and over supply," says the re-port.
"We are not calling for an all out rout in the market - but caution is now decidedly warranted."
The Canadian Real Estate Association put the average MLS sale price in Calgary for November at $398,722, about on par with one year ago, while the Canadian aver-age sale price grew by 4.6 per cent to $360,396. In Alberta, the average price of $356,535 increased by 2.7 per cent.
"The Canadian housing market is proving resilient in the face of ongoing global economic and financial uncertainty, to the benefit of Canadian economic growth," Gary Morse, CREA's president, said recently.
The Bank of America Merrill Lynch report says Canadian households are heading into 2012 with record debt and facing a possible spike in un-employment.
Under its base case scenario, the report says it expects housing investment to contract about five per cent in the first half of 2012 "as the economy flirts with recession" but end the year flat as the economy recovers in the second half of the year.
Under a more "adverse" scenario, the Canadian housing market would probably experience a hard landing as it is highly leveraged to jobs and income growth, the report states.
"Moreover, the household balance sheet is stretched and highly susceptible to adverse shocks," the economists wrote. "A spike in the unemployment rate would certainly lead to a pullback in credit demand and leave the multi-unit market significantly over supplied. This market would also likely result in a rise in delinquencies and forced selling, which would see homes prices decline by around 10 per cent."
In its fall Housing Market Outlook, Canada Mortgage and Housing Corp. forecast the average MLS sale price in the Calgary metropolitan area to be $402,000 this year, a 0.8 per cent increase from a year ago and it predicts a 2.2 per cent hike in 2012 to $411,000.
King said the six-month out-look for the domestic economy is "pretty soft," with the net loss of 73,000 jobs over the past two months and a fairly weak prognosis for income growth boding ill for the Canadian housing market. "We think the risks are definitely strongly skewed to the downside," she said.