Fears of Canadian Housing Market Slump Overblown
Fears of Canadian Housing Market Slump Overblown
The 30% drop in seasonally-adjusted monthly housing resales in the first seven months of this year has raised fears that a full-blown slump is in the works for Canada. Last year’s spectacular rally, which not only contrasted sharply to the moribund state of housing in most other parts of the developed world but also heated up conditions to even greater levels than those which prevailed in 2007, are perceived by some as evidence of a bubble threatening to burst anytime.
- The sharp decline in housing resale activity since the beginning of the year has ignited fears that the Canadian market has started to crash.
- In large part, such concerns are based on the belief that the spectacular run-up in prices in the past several years reflected bubble-like conditions, which will inevitably end up in a gut-wrenching correction.
- While we agree that housing prices are currently historically elevated, we do not believe that any major slump will necessarily ensue.
- Housing affordability – the best indicator of underlying market tensions, in our view – has deteriorated in recent quarters but remains much better than it was in the late 1980s and early 1990s when bubbles clearly caused the Canadian market to meltdown in the years that followed.
- The further expected modest erosion of affordability in the period ahead is seen to cool housing demand not deep-freeze it.
Home prices, overall, are generally expected to stay above water in Canada, although there are some local markets, such as such as Vancouver and, possibly, Montreal, where very poor affordability could well lead to declines to correct these imbalances.
Such fears are rooted in the significant price gains since 2001 that far exceeded household income growth in Canada. Home prices nearly doubled nationally during that period, while disposable income grew by less than 50%. The ease with which the Canadian market recovered the losses incurred during the (short-lived) downturn of the latter part of 2008 and early 2009 and with which prices surpassed previous record highs during the rally only feed the notion that the Canadian market is being driven by irrational behaviour.
However, we find little compelling evidence of irrationality or bubbles in the overall Canadian market relative to historical patterns.