A slow down, but how slow

Bank of Canada Governor Mark Carney raised eyebrows last month when he said in his latest forecast that investment in housing, a key engine powering the faster-than-expected recovery, would "weaken markedly" in the second half of 2010 and "well into 2011."

This brought the dreaded bubble question to journalists’ minds.

Asked at an April press conference whether there’s a risk the housing market might crash, Mr. Carney rhymed off reasons why it will slow from its lofty levels but added, "I think the terms you use, which I am not going to repeat, are extreme."


The market is bound to cool, he said, because the flood of buyers lured into the market starting late last year is abating as higher interest rates draw nearer, government incentives such as the home-renovation tax credit have expired, and a tax being introduced in Ontario and British Columbia this July will deter purchases.

Indeed, mortgage rates are already going up at some major banks in anticipation of a Bank of Canada tightening campaign, and stricter mortgage rules introduced last month will also shut some would-be buyers out.

The next seven days could provide evidence that a dampening trend is already under way.

Monday morning, Canada Mortgage and Housing Corp. releases April data on housing starts, which cooled for the first time this year in March as condominium construction eased.

On Wednesday, Statistics Canada releases March data on new-home prices, using an index that rose for an eighth straight time in February, but by just 0.1 per cent after gains four times as big in December and January.

Next Monday, the Canadian Real Estate Association is slated to issue its latest report on the resale market, where double-digit price increases on a year-over-year basis have been the norm for more than six months. The average price in March was $340,920, 18 per cent higher than in March, 2009, and just below a record high set in October.

But while it seems certain the market will weaken, don’t over-interpret Mr. Carney’s term "markedly." TD Bank last week revised its real-estate forecast to project a 2.7-per-cent drop in prices next year instead of a gain. However, the bank left its prediction in place for 2010, saying there should be about 475,000 transactions at an average price of $350,000 – a 9-per-cent increase compared to the end of 2009. While TD’s forecast is more pessimistic than CREA’s call for a 1.5-per cent drop in prices, the bank’s report characterized it as "a modest price pullback."

That’s not even in the same ballpark as the U.S., where average home prices nationwide are still about 30 per cent below their pre-crisis peaks in mid-2006.

(prepared by Jeremy Torobin/Globe & Mail)