Housing market could soften but not crash

A deep, protracted U.S. recession would drag Canada's housing market lower and push back its recovery, but would not spark a crash, a senior economist at CIBC World Markets Inc. says

Each day, the situation in the United States darkens, causing understandable concern about how far home values could sink in the Canadian market.

However, while home prices will continue to soften modestly in Canada, conditions in the U.S. will not cause a full-scale housing collapse here, said senior economist Benjamin Tal.

“Every dollar drop in the value of Canadian real estate elevates the level of anxiety about a U.S-style housing meltdown in Canada,” Mr. Tal said in a report released Tuesday.

“To be sure, house prices in Canada will continue to ease in the coming months. but the triggers that led to a freefall in Canadian real estate markets in the early 1990s and today in U.S. markets are nowhere to be found,” he said.

Mr. Tal has added his voice to those of many other economists trying to determine where the housing market in Canada is headed in the face of economic turmoil south of the border.

While many economists agree the Canadian housing slump will be moderate, others have raised the spectre of a much more serious decline, which could mirror the one playing out in the U.S.

Too much leverage in Canadian households could be the “tipping point” for a U.S.-style crash, warned David Wolf, economist at Merrill Lynch & Co., in a report last week. The housing market here could “take it on the chin” if the United States goes into a deep recession, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc.

The average price of a resale home in Canada declined by 4.6 per cent year-over-year in August, according to data released Tuesday by the Canadian Real Estate Association (CREA).

The dollar volume of sales fell 5.5 per cent to $11-billion in August from the previous month, with fewer sales in British Columbia responsible for more than half of that decline, CREA said.

At the same time, the median number of days homes are remaining on the market is on the rise. Median days on the market rose by varying degrees for detached homes and condos in Vancouver, Calgary and Toronto, the three markets for which these data were included in the report. Detached homes in Calgary stayed on the market for an average of almost 50 days, the longest since 2000, which is the earliest year included in the report.

“We can't recall a press release of these data with less ebullient commentary than today's [Tuesday's],” Mr. Wolf said in a report released after CREA's data came out.

The level of new listings across Canada moderated month-over-month in August, although supply still greatly exceeded demand in a number of cities.

“It's not clear whether the listings decline reflects a useful move towards supply/demand rebalancing or simply discouragement on the part of sellers at the pace of sales and the level of prices,” Mr. Wolf said.

Despite the softening market in Canada and chaos playing out in the U.S. financial and housing markets, there's still no trigger here for an outright collapse, Mr. Tal said.

A spike in interest rates was the trigger that sent the Canadian housing market spiralling in 1990, and a surge in subprime lending is what has toppled the U.S. market, he said.

The subprime crisis, however, will not act as the same catalyst in Canada, Mr. Tal said.

That's because at the peak of the housing cycle in the U.S., risky mortgages accounted for 33 per cent of originations. By contrast, they accounted for just 5.4 per cent of Canadian mortgages at the peak, he said.

In cities with above-average subprime exposure prices have fallen by more than 25 per cent from their peak in June, 2006, he noted. By contrast, in U.S. cities with single-digit subprime exposure prices have fallen by 5 per cent. This is much more comparable to what has happened in Canada, Mr. Tal said.

“By almost any measure, American households entered the current housing crisis from a more vulnerable position relative to their Canadian counterparts,” he said.

Canadians have a lighter debt load and higher net worth, and there's been much less speculation in the real estate market here than there was in the U.S., Mr. Tal added.

(prepared by Lori McLeod/Globe and Mail)