Housing in Canada not to collapse like the USA did

Canadian homeowners are unlikely to experience a U.S.-style decline in the value of their homes, says a report released today by the Canadian Real Estate Assocation.

Photograph by: Reuters, Reuters

CALGARY – Canadian homeowners are unlikely to experience a U.S.-style decline in the value of their homes, says a report released today by the Canadian Real Estate Assocation.

Instead, home prices will stabilize and will remain stable for some time, said the report.

“The relationship between average price and income has recently been cited as portending a U.S.-style correction in Canadian home prices,” said Gregory Klump, chief economist with CREA. “However, such warnings ignore the longer-term relationship between prices and income, and disregard typical Canadian housing market cycle dynamics.”

Just yesterday a report by CIBC World Markets Inc. said that on average Canadian home prices are now around 14 per cent over their “fair” value. The report also said that higher interest rates will likely lead to a “modest” decline in prices of between five to 10 per cent in the coming year or two.

CIBC said at least 1.5 million houses in Canada are now overvalued and this represents just over 17 per cent of all dwellings. Of those homes, about 760,000 are overvalued by more than five per cent. The report said 17.4 per cent of Alberta homes are overpriced.

But CREA’s report said home prices tend to rise in cycles, characterized by periods of sharp growth and periods of stability. By contrast, income generally follows an orderly upward trend over time.

“For home prices to keep pace with incomes, they must rise faster during housing booms to make up for periods of little or no price growth. Canadian home prices were stagnant throughout most of the 1990s, while incomes continued rising, making housing more affordable. Over the past decade, home prices have climbed sharply as mortgage interest rates declined,” said the CREA report.

Klump said that the Canadian housing market is now widely thought to be at, or very near, the top oaf a cycle and the ratio of home prices to incomes is high, but he said the ratio will revert to its long-term average as it always does as part of a normal housing market cycle.

“History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again,” he said.

Klump said conservative lending practices in the mortgage industry combined with “prudent borrowing and accelerated payments among Canadian mortgage holders” will help Canada avoid a U.S.-style housing crisis.

“The correction in U.S. home prices is set against a massive oversupply of homes due to distress sales, combined with a drop in housing demand due to unemployment. The unwinding of the housing boom in Canada will be more orderly, characterized by softening sales activity and stable prices,” said the CREA report.

mtoneguzzi@theherald.canwest.com