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Canadian real estate is overvalued, slowdown is high

Canadian real estate is overvalued, slowdown is high

A modest drop in housing prices and a gradual decline in home sales over the next few years is the best scenario offered in a TD Bank Group newsletter Friday.

Canadian real estate is overvalued, the group’s chief economist Craig Alexander said in his newsletter “Perspective.” The question is by how much.

Some economists expect as much as a 20-25 per cent price correction, he said. Others, including TD, forecast 10-15 per cent.

A sharp drop could come with a spike in unemployment or interest rates, causing broad economic problems, but neither prospect appears likely in the next two years, Alexander said. On the other hand, moderate economic measures could be taken to avoid such dangers.

“When driving on ice you don’t want to slam on the brakes and create a problem,” he advised in an interview. “But when the road conditions are dangerous you want to slow your speed.”

In the Toronto real estate market, the condominium building boom raises questions about whether enough buyers or renters can be found to fill them, Alexander’s paper says.

In Vancouver, the challenge for local buyers is affordability, with wealthy foreign buyers viewing the city as an attractive place to live or invest, it says.

At the same time, the Canadian Real Estate Association continues to report rising house prices in some regions. The average GTA home was worth about 8.5 per cent more in January than it was a year earlier, the association said recently giving its latest figures.

Connected to overvalued house prices is the rise in household indebtedness, fueled over the past decade by real estate secured loans, Alexander writes.

Debt-to-personal disposable income sits at more than 150 per cent, with debt rising 6.1 per cent year-over-year.

Housing overvaluation and high household debt present risks to the overall economy in the form of job loses, tighter lending conditions and house price declines, the newsletter says.

Gentle economic braking, Alexander said, might include shortening maximum mortgage amortization to 25 years from 30 years.

Mortgage lenders could assess an individual’s ability to pay a mortgage based not only on current low-interest rates but also on potentially higher future interest rates.

The minimum downpayment on a mortgage could be modestly raised to 7 per cent from 5 per cent, he suggested.

Economists forecasting a house-price correction in the 25 per cent range over the next several years include David Madani, of the Toronto research consultancy Capital Economics.

“We’re not expecting a sudden sharp collapse (in house prices) but we’re not expecting a gradual soft landing, as I think a lot of other economists are,” Madani said in an interview.

“We think this will have substantial negative implications for the broader economy,” he said. “Obviously, falling house prices will hurt household net worth, (which) will mean weaker consumption growth.”

While not forecasting one, Madani said the potential for a recession from a 25 per cent decline in house prices does exist.

SOURCE:http://www.thestar.com/business/article/1147736--canadian-real-estate-is-overvalued-slowdown-is-nigh