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U.S. fixed-income giant PIMCO is maintaining its bearish view of Canada’s housing market. Ed Devlin, who heads up Canadian investing for Pimco, told BNN the firm expects a 5-to-10 percent drop in home prices over the next five years.
“If you think about that in real terms, adjusting for inflation, that actually gets you to a negative return of about 20 percent,” said Devlin. “That would be the kind of correction that would take the majority of the froth out of the market and still not be the kind of thing that would lead to a Canadian recession.”
Devlin said PIMCO expects single-family home prices in Toronto and Vancouver to bear the brunt of any correction.
“What we’re watching very closely for the Vancouver market is some of the reforms going on in China in terms of clamping down on capital flight and corruption,” he said. “I think for Toronto, it’s simply a sense of valuation getting a little bit too frothy.”
On PIMCO’s website, Devlin wrote that house prices would only collapse if there is a sharp hike in interest rates, a dramatic increase in unemployment or a disruption to mortgage credit. The world’s biggest bond fund cut its Canadian debt holdings in 2014.
Devlin admitted PIMCO was a bit early with its bearish Canadian housing call, but said with the U.S. Federal Reserve now ready to raise interest rates this month, Canadian rates are also likely to increase, leading to lower consumer spending and a slight jump in mortgage defaults.
“We see more of a headwind not a storm,” he added.