Bankers cautious on housing market
One of Canada's leading economists says the best case scenario for Canada's hot housing market in 2012 would be for nothing to happen at all.
"What I hope to see is that house prices don't rise this year," CIBC economist Avery Shenfeld told a business audience at a breakfast luncheon in Toronto Thursday. "If we can get prices to level off, we can avoid some of the pain later on," he said.
Shenfeld's remarks came during a panel discussion at the Economic Club of Canada. Along with his peers at some of Canada's other major banks, Shenfeld answered reporters' questions on a slew of financial topics.
Real estate questions were a recurring theme. The average selling price of a Canadian home sat at $360,396 in November, a 4.6 per cent increase over the same month a year earlier. But that modest gain was a departure from growth rates in the first part of the year, where double-digit gains were the norm.
If we're lucky, Shenfeld says we'll see modest gains like that and even slightly lower through 2012.
Buoyed by record low interest rates, Canadians have been on a multi-year real estate tear of late, borrowing more money to invest in the hot Canadian real estate market.
Shenfeld says he thinks Canadian home prices may be overvalued by as much as 15 per cent at the moment, but he doesn't expect a hard correction any time soon because the other fundamentals of Canada's economy — the job market, for one — remain relatively strong.
"The catalyst for a correction just isn't there," he said. "We've largely lent to those who have the income and ability to pay."
Home prices are rising much faster than incomes, which has stoked fears of a bubble about to pop. Shenfeld said rather than a continuation of boom times, or a significant correction in home prices, he hopes to see zero growth in 2012. That would let off some of the steam from the market, while allowing incomes to catch up and put some breathing room back into Canadians' balance sheets.
"The bigger they are, the harder they fall," Shenfeld said. "I don't expect to see a crash, but if they level off we won't be borrowing as much for housing either, so we won't be chasing even higher prices."
Others echoed that cautious assessment. "The conditions aren't in place yet for even a mild correction in the Canadian housing market, let alone a serious one," BMO economist Douglas Porter said. "Sales numbers may be flat in 2012, but the underlying strength of Canada's economy is likely to hold up prices at their current level or moderately higher."
Porter says he expects new housing construction to come in about 10,000 units lower in 2012 than it did in 2011, a sign of a manageable slowdown in the market. "We've seen a real moderation in Vancouver already so that city will continue to be an outlier," Porter said, but in terms of the rest of the country, the market looks fairly balanced.
Indeed, there's a chance of higher prices to come. "We could see the housing market strengthen and deliver a surprise instead of having a relatively flat performance or a weakening one," TD Bank economist Craig Alexander said.
But if 2012 becomes a continuation of 2011 and strong price increases become the norm, that would bring its own set of challenges, Alexander warned. "If we see a surprise on the upside the government will take action to tighten mortgage rules," he said.
Twice in the past two years, Ottawa did just that, with Finance Minister Jim Flaherty implementing new mortgage rules that shaved the maximum amortization for an insured loan (it used to be as high as 40 years, but has been reduced to 30) and a steady increase in the minimum amount you must have as a downpayment to get a CMHC-insured mortgage (now up to 5 per cent for first-time buyers, and 20 per cent for a second investment property).
Alexander said if the market doesn't cool down enough for policymakers' liking this year, he wouldn't be surprised to see Ottawa lower the maximum amortization period down to 25 years. "I don't think they're inclined to do that," Alexander said, "but to be frank if you can't afford a house at 25 as opposed to 30 then you probably can't afford that house in the first place."