Canadian housing prices seen falling, not crashing

Thu May 30, 2013 11:56am EDT
 

By Andrea Hopkins and Deepti Govind

(Reuters) - Canadian house prices will fall 5 percent in the next few years, with Vancouver and Toronto leading the drop, but the government has done enough to cool the once-hot housing market and Canada will not see a U.S.-style crash, according to a Reuters poll.

The survey of 21 forecasters showed about half have some level of concern that Canadian house prices are at risk of a sharp fall, but none believe the correction will result in the devastation seen in the United States five years ago.

A housing slowdown is already well underway in Canada, but a soft landing is widely expected by both private economists and policymakers. Home sales fell 3.1 percent in April from a year earlier, but they edged up from the prior month as spring buyers breathed life back into the market that had been cooling all winter.

"Government policies have been largely successful in slowing real estate activity, in conjunction with a notable change in sentiment. House prices are clearly vulnerable to a correction in nominal terms, but we believe a more gradual adjustment in real home prices is more likely," said Moody's Analytics senior economist Mark Hopkins.

The prospect of a soft landing has been helped by Canada's more conservative approach to home ownership and mortgage lending, including government moves to tighten lending rules in recent years.

In addition, mortgage interest is not deductible, lenders are less likely to securitize mortgages, and there is little subprime lending. Canadians also have more equity in their homes than Americans did.

"Tighter mortgage rules have slowed credit growth, helping to cool the housing market in an orderly fashion - hat tip to policymakers," BMO Capital Markets senior economist Sal Guatieri said in a recent housing report.

Canada is now experiencing a slowdown in housing activity just as the U.S. housing market is showing clear signs of recovery, making the comparison between the two markets more stark.   Continued...

 
A woman walks past graffiti which reads, "KA-CHING" near condominium buildings behind a lot of vacant land that is boarded up in Toronto September 21, 2012. REUTERS/Mark Blinch