New housing numbers point to soft landing
Popular catastrophist scenario appears increasingly unlikely
Written by Jay Bryan, Montreal Gazette
MONTREAL — For more than a year, there have been two
competing narratives about the future path of Canada’s high-flying
housing market: total collapse and moderate decline. The moderates, if
we can call them that, still seem to me to have the better argument,
especially when you consider the unexpectedly upbeat housing resale
figures last month.
Friday’s report from the Canadian Real Estate
Association demonstrates that national home sales continue to be
significantly lower than those of a year ago, but that virtually all of
this decline happened abruptly last August, reflecting a tough squeeze
on mortgage-lending conditions in July by Finance Minister Jim Flaherty.
Since then, however, there’s been no further month-to-month downtrend,
notes CREA chief economist Gregory Klump.
Prices, which don’t
necessarily track sales right away, have also weakened, but less. While
sales are down five per cent from one year ago, average national prices
are actually up by three per cent, as measured by the CREA Home Price
Index. However, this year-over-year price gain has slid gradually from
the 4.5 per cent recorded in July.
What’s the bottom line? In my
opinion, it’s that the catastrophist scenario detailed not just by
eccentric bloggers but also in national newspapers and magazines, looks
increasingly unlikely.
That’s not to say this outcome is utterly
impossible. At least one highly regarded consulting firm, Capital
Economics, has been predicting for two years that this country faces a
25-per-cent plunge in average home prices. This is the kind of drop —
almost comparable to the 30-per-cent-plus crash in the U.S. — that would
probably trigger a bad recession, especially in today’s environment of
subdued economic growth.
David Madani, the economist responsible
for this frightening prediction, understands the housing numbers very
well, but he simply doesn’t share most other analysts’ relative
equanimity about what they mean.
Yes, Canada’s banks are
financially stronger and more prudent in their lending than their U.S.
counterparts, he acknowledges, and yes, there’s little evidence of the
fraud and regulatory irresponsibility that worsened the U.S.
catastrophe, but he sees the psychology of overoptimistic buyers as
uncomfortably similar. What looks like enormous overbuilding of condos
in the hot Toronto market help to make his point, as does the
still-stratospheric price of Vancouver housing.
Madani certainly has a point, but the countervailing evidence seems even stronger.
A
key example is the behaviour of Canada’s housing market over the past
six months. The latest squeeze on mortgage lending, the fourth in five
years, is also the toughest, points out economist Robert Kavcic of BMO
Capital Markets. It drove up the cost of carrying a typical loan by
nearly one percentage point, or about $150 a month on a $300,000
mortgage. And as this shock was hitting the housing market, Canada’s
employment growth was slowing.
In a market held aloft by
speculative psychology, it seems very likely that such a hammer blow
would bring about the very crash that pessimists have been predicting.
Instead, though, the market reacted pretty much as it had during
previous rounds of Flaherty’s campaign to rein in the housing market,
notes Derek Burleton, deputy chief economist at the TD Bank.
Sales
dropped moderately, but the decline didn’t feed on itself as it would
in an environment of collapsing speculative hopes. Instead, the market
proved to be rather resilient, with sales plateauing and then actually
rising a bit in January. Burleton, along with Kavcic and Robert Hogue,
an economist at the Royal Bank who follows housing, believe that we’ve
already seen most of the market downside that will result from
Flaherty’s move.
This doesn’t mean that the market is out of the
woods. It’s still overvalued, not hugely, but by something like 10 per
cent, Burleton estimates. But moderate overvaluation can persist for
years unless the market is hit by some shock to incomes or interest
rates.
While there’s no agreement on the path prices take from
here, some of these analysts think they’ll drift down slowly, maybe
three to eight per cent over a few years. At the same time, rising
take-home pay will be shrinking the amount of overvaluation, creating a
more sustainable market. Let’s hope they’re right.
Read more:
http://www.montrealgazette.com/homes/Bryan+housing+numbers+point+soft+landing/7973381/story.html#ixzz2LT23iQ98
