The slowdown is good because it should avoid a more severe correction
By James Langton | January 16, 2012 17:10
The latest data on Canada's housing market shows that conditions are clearly softening, and that's a good thing economists say. "There are clear signs that the Canadian housing market is softening," says CIBC World Markets in a new report. It notes that while sales activity rose by 1.8% in December 2011, the number of new listed homes roses by 3%, leading to a decline in the national sales to new listing ratio from 55.5 to 54.8. "Clearly this is still a well-balanced picture, but the trend is of a slowing market," it says.
Additionally, home prices were up just 0.9% (year over year) in December, which was the slowest pace since October 2010, CIBC reports. And, it says it's probable that the first year-over-year decline in prices since the recession will occur in the first quarter of 2012.
This view is echoed by other firms. "The picture painted by the latest statistics on Canadian housing continues to be consistent with an overall market that is showing moderation on nearly all fronts," notes RBC Economics. "We expect that widespread moderation will be sustained in 2012." It calls for minimal growth in both home resales (0.4%) and prices (0.5%) overall in the year ahead.
However, TD Economics cautions that 2012 "is likely going to be a bumpy ride... The first half of this year will likely see housing activity pullback further from its current level alongside both global and domestic economic conditions, while the second half of the year is likely to see some improvement as those same factors improve."
This slowing is good, economists say, because it should avoid a more severe correction, as housing price increases were still outpacing incomes in 2011. BMO Capital Markets, which also sees signs of moderation in the market, says, "Debt‐heavy households are expected to curb their appetite for mortgages, pointing to some further moderation in housing in 2012. We look for both sales and prices to be roughly flat this year. That could be just what the policy doctor ordered, allowing incomes to catch up to higher prices."
"Indeed a softening in house prices in the next year or so is a necessary condition for... a soft-landing scenario," adds CIBC. "If the pace of house price increases accelerates during that period, then a year or two from now the likelihood of a violent price correction will be higher than it is now."
TD suggests that low interest rates should help prop up the housing market in 2012. "However, this will only delay the inevitable as the normalization in interest rates in 2013, which will lead to a more sustained correction in both sales and prices," it says.
"While we do not see house prices crashing, we do believe that house prices in Canada will level off in the near future and might start trending downward modestly," CIBC says. "Further out, the most likely scenario is that the eventual increase in interest rates will lead to a decline in prices (probably in the magnitude of 10%-15%). But given the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years — paving the way for a healthier housing market later in the decade."