Bankrate.ca

 

May 25, 2014

 

Housing just fine CMHC says

Latest outlook says a soft landing is in the works.

 

Debate about Canada’s residential real estate market took a new turn this month following publication of the Canada Mortgage and Housing Corporation’s latest outlook, which suggests that all is fine, despite persistent bubble talk.

 

The CMHC predicts that average resale housing prices will rise by 3.5 percent in 2014 and by another 1.6 percent the year after. This would be the ideal “soft landing,” scenario, hoped for by financial sector stakeholders who have bet big on the multi-year residential boom.

 

“Builders are expected to continue to manage their starts activity in order to ensure that condominium demand is first channelled toward unsold units,” said Mathieu Laberge, the CMHC’s deputy chief economist, in a statement accompanying the forecast.

 

The CMHC’s outlook roughly parallels those of the Canadian government, the Bank of Canada and the country’s large financial institutions, all of whom suggest that house prices are more or less in line with economic fundamentals and will either rise at a slower pace, or will fall just slightly.

 

For example Robert Hogue, a senior economist with RBC recently published a note to clients, boosting the bank’s 2014 forecast. “We think that the recent reductions in fixes mortgage rates (to historical lows) holds promise to generate further action in the near term,” says Hogue. “We expect resale activity to stabilize later this year near the long-term average “cruising altitude.””

 

So far, the data appear to be proving the experts right. According to the Canadian Real Estate Association, home sales increased by 2.9 percent between March and April. This third consecutive monthly increase was driven by a rebound in activity in the greater Vancouver area and a jump in Toronto sales. Although housing sales during April were slightly below levels reached during the April of 2013, average prices increase by 7.6 percent to $409,708.

 

The building trades also appear to be doing well according to the CMHC. “In April the trend in housing starts was essentially stable at 183,515 units,” said Laberge. “This is in line with (our) analysis indicating that the new home construction market is headed for a soft landing.”

 

Of course not all observers are as bullish as the Canadian financial and government establishment, most of whom have huge financial and electoral interests in painting a rosy picture. In fact many international firms are far more pessimistic. The latest of those to speak out is David Madani, a Canada expert at Capital Economics, a research firm, who re-iterated his projections that the local housing market could slump by as much as 25 percent.

 

The CMHC had better hope that the rosy scenarios that Canadian forecasters put out aren’t “group think.” The government-owned provider has insured hundred of billions of dollars of mortgages. Many of these contracts were issued at highly attractive rates, during a time when there was a good chance the market was in bubble territory.

 

In the United States, the two major government sponsored enterprises that support mortgage loans - Fannie Mae and Freddy Mac, - were both similarly aggressive during the US housing bubble, which showed remarkably similar patterns to hose in Canada. When rough times hit, both institutions became technically bankrupt and had to be bailed out.

 

Peter@peterdiekmeyer.com

 

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