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Canadian home prices will slip over the next few years, but the country will avoid a dramatic housing bust similar to the one experienced in the U.S., according to economists at CIBC.
"To be sure, house prices in Canada will probably fall in the coming year or two, but any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market," CIBC economist Benjamin Tal says in a note to clients.
Tal says the fear of a housing collapse is based on confusion over the difference between the U.S. and Canadian housing markets and household balance sheets.
But even clarifying those misunderstandings, Tal says there is plenty to be concerned about when it comes to Canadian household balance sheets.
He warns that claims that Canada's low delinquency rate, recourse rules and non tax-deductable mortgages will shield it from a pullback in housing prices are misleading. In recourse jurisdictions, lenders can go after a borrower's other assets in the event they can't pay off a mortgage.
The economists point to data that the U.S. had low delinquency rates prior to the housing crash, little evidence that non-recourse and recourse states performed differently during the housing bust and research that very few low-income homeowners took advantage of mortgage interest deductability.
But on a positive note, the economists say the overbuilding in Canada's housing market is far tamer than in the U.S., credit profiles of Canadian households are much stronger and a far higher percentage of Canadians have greater equity in their homes than in the U.S.
The economists say that if you strip out states suffering from massive sub-prime borrowing, the country would have experienced a "soft landing."
And lastly, CIBC says concerns about the impact of higher rates on Canadian households may be overblown, as a growing number of borrowers are locking in at lower rates and steering clear of adjustable rate mortgages. They add that in the U.S. many homeowners suffered from the dramatic impact of expiring teaser rates and other "mortgage gymnastics."
"Home prices are overshooting their fundamentals, mainly in large cities such as Toronto and Vancouver. The recent slowing in sales activity will probably be followed by price adjustments in many cities across the country," Tal says. "But the Canada of today is very different than a pre-recession U.S., namely as far as borrower profiles are concerned. Therefore, when it comes to jitters regarding a U.S.-type meltdown here at home, the only thing we have to fear is fear itself."