House Price Collaspe coming, report warns

Tue, 05 Jul by Georgina Burkholder

While there are parts of the country where prices have become overheated ( think Vancouver), Calgary isn’t one of them.  We should expect prices here to hold their own and move up slowly as economic activity builds.

Article below from The Calgary Herald:

A new report states Canada not only has a housing bubble, but suggests it’s close to bursting.

Capital Economics, in a provocative report released Wednesday, said it fears house prices in Canada could fall by as much as 25 per cent over the next three years due to record household debt and market valuations that have “lost touch with fundamentals.”

“House prices have been growing rapidly for nearly a decade now and it has reached the point where housing is so overvalued relative to incomes that a downward correction seems unavoidable,” said Capital Economics.

The projected housing downturn will severely constrain economic growth in the coming years as consumption expands at a more “muted” pace and housing investment “shrinks,” the report states.

“We also anticipate that the end of the housing boom will lead to a marked decline in housing-related activity and employment,” it said.

Bank of Canada governor Mark Carney and federal Finance Minister Jim Flaherty have raised concerns about possible overheating in the Canadian housing market, where prices in some cities, most notably Vancouver, have skyrocketed.

However, Carney did not use the word “bubble” and said conditions should moderate as housing demand is eventually dampened by higher borrowing costs and other factors.

Sano Stante, president of the Calgary Real Estate Board, said the housing bubble is not based on the economic fundamentals seen in Alberta.

“Real estate markets are local, and even within Calgary there are wide variations in the vibrancy and demand for each neighbourhood market,” he said. “Deriving conclusions on the state of the real estate market nationally does not accurately depict the local market within each region, and certainly not the Calgary market.”

Dan Sumner, economist with ATB Financial in Calgary, said the probability of a 25 per cent decline in housing prices is very low.

“Is it possible that housing prices could fall a long ways? Yes. But it would require major shocks like interest rates rising more than expected and commodity prices falling a lot, and not just temporarily,” he said. “The only way for commodity prices to fall materially is if Asia went into a major recession -possible, but not likely.”

Sumner said housing prices in Canada are at their upper limit and as rates rise they could fall very slowly and gradually between five to 10 per cent over the next five years. However, most of this decline would happen in the places that have seen the biggest rises over the past two years: Toronto, Montreal and Vancouver.

The situation in Alberta, where price gains have been slower, makes the market less susceptible to declines, said Sumner.

“And taking wages into account, Alberta has one of the most affordable housing markets in the country.”

The Canada Mortgage and Housing Corp. is forecasting modest increases in Calgary during the next 18 months; an expected 1.1 per cent bump this year in the average MLS price to $403,000, and another 2.2 per cent growth in 2012 to $412,000.

Capital Economics said signs of over-building are evident in Canada as unoccupied housing units are at historically high levels, similar to 1994-95 when housing construction was last mired in a slump.

© Copyright (c) The Calgary Herald

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