Housing market

An outright decline in commodity prices could spell disaster for Canada's housing market, which already appears to have entered a "sustained downturn," David Wolf, an economist at Merrill Lynch Canada, warned on Thursday.

He said while the risk of a housing market crash was small, an "outright bust" in commodity prices would make the scenario "a rather more serious threat."

The recent trickle of data has shown a significant slowdown in the country's housing market, following its record pace of growth. Demand has eased, supply continues to creep up, credit conditions remain tight, and house price growth has turned flat with declines in some regions.

The value of building permits in June fell a seasonally adjusted 5.3 per cent from the previous month, indicating that construction activity in the coming months would likely be lower, Statistics Canada figures showed Thursday. The data is volatile, but the trend rate of growth for residential building has declined since the beginning of the year.

Merrill Lynch expects commodity prices to moderate over the medium term, a scenario that would aid in the housing market downturn but not cause an outright bust.

Others, such as CIBC, have a more bullish forecast for commodities, namely oil, expecting prices to continue to rise. This would continue to support Canada's terms of trade by bringing in higher export revenue relative to the amount spent on imports.

(prepared by Alia McMullen/Vancouver Sun)