Analysis: Canadian housing - bursting bubble or gentle landing?

Thu May 2, 2013 2:18pm EDT
 
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By Andrea Hopkins

TORONTO (Reuters) - It's looking like an unsettling spring in Canadian housing, a market that has proven far more even-keeled and less scary for investors in recent years than in the United States.

In what is traditionally the best season of the year for real estate agents, Toronto agent Ecko Jay says the industry is seeing far fewer buyers, a result of tighter lending rules, high prices and fear of a bubble. In Toronto alone, sales dropped 40 percent in the first quarter from a year earlier, making homeowners and investors jumpy.

"Some people want to cash in and pull out now," said Jay, a 26-year veteran of the Toronto housing market, noting some are spooked by worst-case predictions of a 20 percent drop in prices from current levels.

"They say, 'Before it gets low, let's sell,'" Jay added. "And some of my clients want to sell and rent, hoping that when it goes down they will pick up something at a better price. Nobody has a crystal ball."

But then there are Canadian policymakers, economists and market watchers who have the next best thing to a crystal ball. Their data and analysis point not to a bursting of the bubble like in the United States in 2007-08, when prices from peak to trough dropped 35 percent, but rather a gentle easing in Canadian housing prices, or perhaps just a momentary pause.

Naysayers believe Canada may be too optimistic and relying heavily on that old saw that Canada is not nearly as reckless as the United States. After all, the debt-to-income ratio of Canadians is at a record high, close to the levels experienced in the United States before its market crashed, and home ownership is at nearly 70 percent, also a record and five points more than its neighbors to the south.

But Canada does have some things going for it, most notably a move by the government to tighten mortgage lending rules four times in five years, most recently in July 2012, which has taken some buyers out of the market, dampening demand.

"If you look at the developments over the last year in Canada and compare them to the situation in the U.S. before the crisis, there is a clear difference," said Julien Reynaud, an economist at the International Monetary Fund who follows Canada.   Continued...

 
Cranes stand at various condominium developments in Toronto December 6, 2012. REUTERS/Mark Blinch