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Opinion: Is Canada’s housing market at extreme risk or out of danger?

Price correction imminent, soft landing achieved… it depends which economists you ask
real estate
House prices are expected to cool across the region in 2017. Photo Dan Toulgoet

Readers following national housing market news would be forgiven for being confused about what’s going on, with contradictory reports making it almost impossible to tell up from down.

Canadian home sales in August were slightly up from July, for the fourth consecutive month, according to Canadian Real Estate Association stats released September 17. However, year-over-year, actual (non seasonally adjusted) sales were down 4.8 per cent, driven by the steep annual declines in B.C.

Bank of Montreal chief economist Doug Porter seems confident that, on the whole, this means that the volatile housing market of the past few years is over – albeit with variations between regional markets. He suggested that the soft landing that policymakers have been hoping for has been largely achieved, writing in a client note September 17, “The housing market is for now no longer a major source of concern for policymakers, especially with household borrowing decelerating notably.”

Porter is referring to Statistics Canada data released last week, which showed that Canadian household debt seems to have levelled off. In 2018’s second quarter, the average Canadian household held $1.69 of debt for every dollar of disposable income, down slightly from the same quarter in 2017. The mortgage stress test introduced in January certainly reduced Canadians’ borrowing, with the total value of new mortgages in Q2 around a third lower than in the previous year, according to StatsCan.

Porter added in his note to investors that the national housing market is now “a bit of a yawner, neither drastically hot nor desperately cold.”

However, other economists seem to disagree with Porter’s assessment.

Last week, a global study by researchers at Oxford Economics cited the Canadian housing market as at imminent risk of a major price correction. Assessing the Risks from High House Prices (subscribers only) ranked Canada as the third riskiest housing market in the world, second only to Sweden and Australia, and followed by Hong Kong and New Zealand. The Oxford Economics authors said the level of risk in the top four national housing markets was “especially acute.”

The authors wrote that Canada also had the third most overvalued housing market in the world, with real estate prices at 173 per cent higher than their historical average.

The researchers looked at home prices in OECD countries from 1970 through to 2013 to ascertain risk based on historical patterns. They reported that, as a general trend, when prices rise 35 per cent or more above their historical average, there is a 75 per cent likelihood of a price correction within five years. The study found that where a price correction did occur, the median decrease was 14 per cent. In one-third of these cases, the correction was more than 20 per cent, said the report.

“High valuations are associated with a strong risk of future price declines,” wrote lead economist Adam Slater.

The chief economist at the Canadian Real Estate Association, Gregory Klump, also seems uncertain about the future of Canada’s housing market.

In the CREA’s September 17 report about the August sales stats, Klump wrote that even though home sales have increased for four months in a row, the national housing market recovery is “starting to lose steam” with “increases diminishing.”

What does seem certain is that, with variations in the national housing market so wide, for the average homeowner or homebuyer, it makes much more sense to look at what’s going on provincially or even locally. After all, it's perfectly possible for one region to see a housing market correction that doesn't apply to other areas, and arguably that's what is happening in our province right now.

The B.C. Real Estate Association also asserted last week that the province’s recent real estate downturn is “largely behind us,” according to chief economist Cameron Muir, with B.C. home sales increasing on a seasonally adjusted basis over the past two months. That’s a tough thing for us non-economists to get our heads around, when actual B.C. home sales in August dropped on both a month-over-month and a year-over-year basis – and with a steeper annual decline than the previous month.

But even those B.C.-specific figures mask huge regional differences, with Metro Vancouver and the Fraser Valley seeing much larger sales decreases, while places like Whistler, Squamish and Powell River are seemingly on a tear. 

The future of B.C. and Canada’s housing markets? Apparently, it’s anyone’s guess.