May 30, 2013 / 3:58 PM / 4 years ago

Canadian housing prices seen falling, not crashing

(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.

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

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.

U.S. house prices crashed as a mortgage crisis unraveled in 2008, triggering a financial crisis and leaving a trail of foreclosures, negative equity and financial hardship for millions of people. But U.S. housing prices and construction are showing renewed strength, just as Canada’s post-financial-crisis boom ends.

HOME PRICES, CONSTRUCTION TO FALL

On a national basis, Canadian house prices are expected to drop 5 percent over the next several years, according to the median result of the poll, which was conducted over the past week.

Prices, which rose some 88 percent in the last 10 years, according to the Teranet-National Bank Housing Index, are still rising on a national basis, but the appreciation has slowed to a crawl and some markets have seen outright declines.

House prices will fall 0.2 percent in 2013 and rise 0.5 percent in 2014, according to the median of forecasts in the Reuters poll, putting most of the losses at least two years away and making the downward path very gradual.

Economists have long debated whether moves by the government to tighten lending standards have helped the housing sector manage a soft landing or pushed it into a crash. Only two of 21 surveyed said they expect the government to intervene in a similar fashion in the next 12 months.

“Further macroprudential ‘tightening’ measures may be undertaken by the federal government, albeit more likely through (banking regulator) OSFI or other channels rather than further changes to insured mortgage rules,” Altus Group chief economist Peter Norman said.

Mindful of the U.S. boom and bust, Canada’s federal government tightened mortgage lending rules four times in the last five years to make it harder for home buyers to take on too much debt in their quest for a home.

The rule changes gradually shortened the maximum length for an insured mortgage from 40 years to 25 and put limits on how much people can borrow against their homes, among other measures.

Median forecasts saw Toronto prices rising 1.2 percent in 2013 before falling 1.2 percent in 2014. Respondents expect an eventual 7.5 percent fall from current levels. Vancouver prices were forecast to fall 3.1 percent in 2013 and 3.4 percent in 2014, with an eventual decline of 10 percent from current levels.

As sales decline and prices fall, homebuilders will cut back on construction starts, the poll showed.

Housing starts, which notched a seasonally adjusted annual rate of 214,827 in 2012, will drop to an annual rate of 175,500 in the second quarter of 2013 and drift gradually lower to 170,500 by the first quarter of 2014, the poll found.

However, some economists expect the national slowdown to be sharper and uglier.

“Though prices are elevated and in Sun Life Global Investment’s opinion due to correct by 10 to 15 percent, this will depend on how other important factors play out,” said Sadiq Adatia, Chief Investment Officer at Sun Life Global Investments.

“For instance, there remains high debt levels and if unemployment goes up (as we expect) then that will put further pressure on housing prices. What is keeping this in a soft landing state is that rates are not likely to increase over the next year or so.”

While the Bank of Canada has maintained a tightening bias in its monetary policy statements, interest rates are not expected to rise until the fourth quarter of 2014.

Polling by Deepti Govind in Bangalore; Editing by James Dalgleish

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