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It’s too soon to relax about the Canadian housing market, says Bank of Nova Scotia economist Derek Holt.
“I remain of the conviction that one doesn’t drop one’s guard on housing risks as we push toward higher and higher peaks,” he writes in a research note. “Indeed, one’s guard should be raised…”
Years after warnings about a potential housing market crash surfaced, national home prices are still hitting new records. The sky has not fallen. Canadians are sick of hearing about impending doom, and housing market bears who continue to raise fears are brushed off much like the boy who cried wolf.
Even Toronto’s condo market, one of the most worrisome segments of the broader market, continues to defy negative expectations. Sales of new condos last month were 22 percent higher than a year earlier. Prices, which many economists predicted would drop, ticked up 1 per cent, to a benchmark of $437,773, according to RealNet Canada Inc. So far this year more than 8,305 new condos have sold in the Toronto area. That’s 33 percent higher than last year, and 15 percent above the 10-year average.
Toronto-Dominion Bank economists predicted in March that Toronto area condo prices would fall on average by about 4 percent this year and a further 4 percent next year as a glut of new condos weighed on the market. Three months on, it’s hard to say.
“Condo sales are performing better than expected,” says Canadian Imperial Bank of Commerce economist Benjamin Tal. “As long as we have such momentum, economics 101 suggests that we will not see a drop in prices in the near term.”
Tal warns that the real test of the market will come when interest rates rise. But is anyone listening to warnings any more?
While pockets of the country have sluggish markets, predictions of a crash are now generally being shrugged off as Chicken Little Syndrome amid a stronger-than-expected picture at the national level.
Economist David Madani and the team at Capital Economics started calling for a significant price correction back in early 2011.
“House prices have been growing rapidly for nearly a decade now, and it has reached the point where housing is so overvalued relative to incomes that a downward correction seems unavoidable,” they wrote in a research note at that time. “We fear that house prices could fall by as much as 25 percent over the next three years.”
Three years on, Madani stands by his call. In fact, it remains unchanged.
“I believe it’s a bubble,” he says. “You’ll never get the timing right, but that’s sort of the nature of a bubble. Bubbles contain an element of surprise.”
“The problems are still evident,” he adds. “You’ve got severe overvaluation, overbuilding, and a sharp run-up in household financial leverage.”
He says that other countries, including the United States, were in denial about their own housing bubbles before they reached a tipping point. And he says that Canada’s housing market is now the subject of more concern outside of the country’s borders than in it, pointing to warnings from groups such as the International Monetary Fund and the Organization for Economic Co-operation and Development.
The Bank of Canada said in its Financial System Review this month that a sharp correction in house prices is the top risk to the Canadian financial system.
“In view of the expected strengthening of the global and Canadian economies, the probability of this risk materializing is low,” the Bank said. The Bank and most economists are now of the view that the most likely scenario will be a so-called “soft landing” in which prices peter out without a crash. Indeed, the Bank noted that the pace of national home price growth has moderated. But it also said that “if such a risk were to materialize, the impact could be severe.”
And the Bank once again highlighted Toronto’s condo market as a source of concern, warning that “a correction in this important market could spill over into other parts of the housing market through various channels, including buyers’ price expectations.”