More Warnings Emerge as Canadian Housing Market Remains Overheated

Canadian Housing MarketWhen the Bank of Canada made the surprise decision to reduce interest rates late last month, this proved to be a godsend for consumers, especially those looking to buy a home. Looking at the big picture, one expert believes that the rate cut may actually have an adverse effect on the housing market.

In a recent interview, Capital Economics economist David Madani said that the decision of the Bank of Canada to reduce overnight rates from 1.00 percent to 0.75 percent may have pushed lenders to reduce mortgage interest rates, but might not be what is needed to prevent home sales and prices from moving in a downward trajectory in oil-rich areas such as Alberta. While he noted that lower interest rates may buttress housing activity in other major Canadian markets, the move may “only fuel greater evaluation, higher household debt, and more overbuilding.”

In a dire warning, Madani added that Capital Economics remains “deeply concerned” about the going-forward prospects for Canada’s real estate space.

Currently, sales in Toronto, Vancouver, and other busy housing markets, have been ticking up, with sales up 6 percent in Toronto and up 9 percent in Vancouver for the month of January. As the Bank of Canada rate decrease took effect on January 21, this could mean improved sales stats in the months to follow. Madani’s projections suggest that a decline of 50 basis points, or half a percentage point, in five-year standard mortgage rates could redound to a 5.5 percent home sales increase in the March 2015 quarter, as compared to the December 2014 quarter.

Furthermore, Madani also cautioned against a higher number of “higher-risk” consumers who are dealing with unconventional financial institutions or lenders. “Since much of this lending is essentially sub-prime, we fear that this type of lending and its support to home sales in the short term will only lead to even greater problems and more painful adjustments in the longer term,” he said.

Madani expects home sales and prices to drop 2 percent in 2015, with home prices in Calgary and Edmonton to drop by as much as 15 percent in the following months. On a long term basis, his forecasts point to a 25 percent drop in home prices.

While Madani was noticeably bearish on the Canadian housing market, predicting a similar “bubble” to what happened in America in the late 2000s, other economists are still expecting what is known as a “soft landing” in business jargon – a slower, steadier fall from prominence as opposed to an out-and-out market crash. Royal Bank of Canada economist Laura Cooper said that she is forecasting a “gradual cooling in activity” starting next year, which is when she believes interest rate hikes will start compromising availability. Cooper also expects a Goldilocks market in Canada, meaning one that will be balanced between buyers and sellers.

RBC’s separate forecast states that home prices may go up by 5.6 percent and sales by 10.5 percent in British Columbia in 2015; this is a more optimistic prediction than the forecast that national prices and sales may jump by 3.4 percent and 1.7 percent respectively this year. Conversely, prices in Alberta may tick down by 0.5 percent this year, while sales may plummet 15.7 percent – this, according to RBC’s Cooper, is not a “sharp correction” due to the fact Alberta’s market has been quite fertile in recent years.