Canada's housing market overvalued, but crash worries ease

Tue Nov 26, 2013 12:49pm EST
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By Andrea Hopkins and Deepti Govind

(Reuters) - Canada's housing market is overvalued but prices are expected to continue to edge higher in the years ahead, according to a Reuters poll that showed less concern about a U.S.-style crash than three months ago.

The survey of 19 forecasters showed previous concern about a sharp drop in prices has dissipated over the past three months. Most analysts now predict a gradual rise in national prices and resiliency even in Toronto and Vancouver, the two markets considered most at risk of a bubble.

Canada's housing market has cooled from the most feverish activity so far, in the middle of 2012. Economists, many of whom once expected a sharp price correction, now have a long list of reasons why the market will keep climbing.

They argue that solid rates of immigration, persistently low interest rates, and even limits on homebuilding to preserve green space in some major cities, will underpin the market.

"The main reason people are dismissing a hard landing view now is that we've seen corrections in the last five years, but they have been short-lived," said Sal Guatieri, senior economist at BMO Capital Markets.

The Canadian housing market weakened in 2009 in response to the global financial crisis and recession, but then stormed back before the government tightened mortgage lending rules several times, most recently in mid-2012.

That last move, the fourth effort by the government to rein in lending since the crisis, caused a sharp pullback in demand late in 2012. But home buyers once again came back with strength through the spring and summer of 2013.

While official interest rates are expected to remain at a near-historic low of 1 percent through 2015, gradually rising mortgage rates should help prevent a re-igniting of the housing boom, Guatieri noted.   Continued...