were 1,708 housing construction starts in the Calgary region in April,
up from 556 during the same month last year, says Canada Mortgage and
Photograph by: Calgary Herald
- Although one prominent forecaster recently warned that a substantial
drop in housing prices is on the horizon, other analysts continue to
have a more optimistic outlook.
More likely, the average price in
Canada will be about flat for the foreseeable future, says economist
Robert Hogue, who follows real estate for the Royal Bank.
agreed with Craig Alexander, chief economist at the TD Bank, that home
prices have outrun income growth for years, bringing a decline of 10 to
15 per cent within the realm of possibility.
But he didn’t agree
with Alexander that such a drop is probable – or that tough new
mortgage-lending rules will be enough to trigger it now.
Economist Adrienne Warren at the Bank of Nova Scotia is also moderately optimistic.
rules that require an insured mortgage to be paid off more quickly will
increase mortgage payments, but “I think this will just cool the market
faster for first-time buyers,” not tip prices into a decline, Warren
That’s not to say that prices will remain steady across the country.
in Vancouver are out of reach for many, and those in Toronto seem
headed in that direction, making these cities considerably more
vulnerable to a fall in values.
But Montreal and most other cities
are not significantly overvalued as long as mortgage rates remain low,
says Sal Guatieri, an economist at BMO Capital Markets. “What that means
is that the market has time to correct,” he believes, without the need
for a big reversal.
Outside of the two highest-priced markets,
Guatieri thinks national home price gains will sputter to a halt over
the coming year, then plateau for a few years.
analysts had expected to see prices stabilizing earlier this year. This
hasn’t happened, perhaps because warm weather and promotional rates on
mortgages in the spring stimulated some sales that would otherwise have
occurred this summer.
But sales figures for May showed a sales
drop in most cities, including Toronto and Vancouver, while the average
national price advanced by a moderate 5.2 per cent. True, Toronto
sprinted ahead by 7.9 per cent, but Vancouver prices rose by just 3.3
per cent and those in Montreal by 2.2 per cent.
Warren thinks it
would likely take a recession to tip prices into a significant decline
across Canada. That’s not the prediction of most forecasters, who see
modest growth continuing.
A more typical pattern in a moderately
overvalued market such as Canada’s, she says, would be “a long period of
weak price gains” until rising incomes caught up with steadier home
values. In the past, such stagnation has lasted for as much as a decade,
And even in this scenario, markets in resource-rich
areas such as Alberta and Saskatchewan could keep seeing gains if
commodity markets remain healthy.
It’s important to note that the
difference between Alexander’s prediction of a price drop and other
analysts’ scenario of stagnant prices is merely a question of how fast
prices will adjust, not whether they will.
agreement that Alexander’s estimate of average overvaluation in Canada
is near the mark – somewhere close to 10 or 15 per cent. There’s also
general agreement that Vancouver and Toronto are the most overvalued
The disagreement is about how the real estate market will
react as Canadians approach the limit of their borrowing power – just
as new lending rules make a mortgage even more expensive to carry. Both
will make the number of eager buyers dwindle.
There’s no doubt
that in an expensive housing market, prices can fall. But usually,
there’s a clear cause: Canada’s recession brought a one-year slump,
while irresponsible lending, speculation and a banking crisis in the
U.S. created a much deeper crash that has yet to heal.
a powerful prod, homeowners are famously stubborn about avoiding a
loss. Many will simply hold off selling if prices are too far below what
“There’s very little pressure on homeowners” apart
from the few forced to sell by a transfer or loss of a job, notes
Guatieri. So the market normally just stagnates for a while.
stagnation isn’t the same thing as avoiding a loss; it’s merely a way of
slowing it down. Every year that a home’s price rises by less than the
rate of inflation, its true value falls a little. Meanwhile, incomes
creep up. After a while – maybe a long while – the market returns to