September 24, 2014


Another typical week in Canadian housing

Investment expert says prices could fall by half. Harper says everything is fine.


The debate over Canadian housing valuations took another turn this week, which if nothing else, provided sector stakeholders with considerable entertainment.


It started when Stephen Harper told an audience of New York financiers that residential real estate here is in good shape and not significantly vulnerable to a rise in interest rates. Conversely shortly thereafter, Hilliard MacBeth, an Alberta-based portfolio manager and author of the forthcoming book When the Bubble Bursts, told a Toronto newspaper that housing prices could fall by as much as half.


The comments add fuel to a debate that has been going on since the end of the last recession when Canadian residential real estate bucked a strong international trend that saw prices plunge in major markets around the world ranging from the United States, to Great Britain and Asia.


A long running debate

So far doomsayers, such as Garth Turner, a former federal cabinet minister, who in his 2008 book titled The Greater Fool, also predicted a residential real estate crash, were early in their calls as best.  While Canadian housing prices fell temporarily during the 2008-2009 recession, they have bounced back big time since then, and those who held on have reaped huge profits.


According to the Canadian Real Estate Association the average price for homes sold in August 2014 was $398,618, that’s up by nearly 30 percent from the time Turner’s book was published.


Still housing market bears do make good points. They note that residential real estate prices here are at record levels relative to rents and household incomes. Furthermore many out of country observers ranging from Deutsche Bank to the International Monetary Fund have expressed alarm.


Prices and housing starts remain strong

That said, both existing home sales prices and housing starts data remain bullish. According to the Canada Mortgage Housing Corporation builders began construction on new homes at a seasonally adjusted annual pace of 192,000 units during August. Although that was a slight decline from the previous month, the pace remains far above what is needed to keep up with household formation. Furthermore according to the Teranet-National Bank index, Canadian house prices rose by 0.8 percent in August, a second month monthly increase.


Marc Pinsonneault, an economist at National Bank attributes the strength in part to the fact that “mortgage rates have declined to almost historically low levels in the last few months.” This has boosted sales activity to the point that Pinsonneault projects prices to rise by 5.0 percent for the year as a whole, following increases of 3.8 percent in 2013 and 3.1 percent in 2012.


That said, although it is entertaining, the disagreement between the Harper Government and Bank of Canada governor Stephen Poloz, who act as though all is fine, and housing market bears is far from a laughing matter. Residential real estate is the single largest asset for most Canadian families. And while most have registered nice gains in recent years, they take talk that these gains might be vulnerable very seriously.






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