Is Canada’s housing market on the verge of a crash?

Canada's housing market has been a wildly popular topic lately with experts sounding off on everything from house-market affordability to house-buying intentions to the effects of too-long, very-low interest rates. All this is keeping the debate about the soft landing, or crash to come, firmly on the minds of Canadians.

The common link is the Bank of Canada's benchmark rate, which has been frozen at 1.0 per cent since September 2010. The market doesn't expect the central bank to move higher -- if it moves higher -- until sometime in the latter part of 2014, or even later, so in some ways there's a bit more time to sit back, wait and watch.

If you believe The Economist, Canada's housing market is "especially vulnerable" to a major correction, according to a recent analysis on global property markets. It says house prices here are overvalued by 73 per cent compared to rental prices, and 32 per cent overvalued when compared to household incomes.

"Home sales in March were 15% down on a year earlier. Buyers are in short supply. A recent poll showed that only 15% of Canadians are likely to buy a home in the next two years, down from 27% last year—the steepest decline in the 20-year history of the survey. After a big boom, the housing bust will be a wrenching affair," the magazine stated earlier this month. This is golden for those who are in the doom and gloom camp, and don't believe house prices will bounce any time soon.

Now, combine that with a recent warning by the Canadian Association of Accredited Mortgage Professionals. This week the group said many Canadians are managing their debt responsibly, and warned Ottawa's clampdown on mortgage lending rules has set the stage for up to a 30 per cent plunge in home sales by 2015, translating into massive job losses related to the industry and other negative things that could crimp economic activity. Think of all those first-time home buyers who may be on the sidelines.

But in findings that appear to contradict The Economist and other pessimistic views, an RBC Economics analysis stated that while Canada’s housing market still faces higher-than-usual stress, recent affordability measures don’t suggest a “significant nation-wide price correction is imminent.” In fact, the low mortgage rates helped make owning a house relatively affordable -- though arguably a more accurate definition would be less unaffordable -- in the first quarter of 2013, of course, with variations across regions.

At the same time, BMO housing confidence report showed consumers' buying intentions were bolstered by low interest rates. This poll found some 45 per cent of Canadian homeowners say they are looking to buy a property in the next five years, also with results varying from region to region, in another bit of data to play up the good news story to reassure Canadians the sky isn't falling. What's more, it says first-time homebuyers could take advantage of low rates and shorter amortization periods for financial stability.

Given all the data, one can't help but think everything is being held together -- but just barely -- thanks to low interest rates.

On that note, consider one final, powerful warning to add to the mix. The head of the country's banking watchdog told a Bloomberg economic summit this week that a transition to higher rates could be really, really bad. That is, it is a greater incentive for banks to take on more risks when lending, business to depend on cheap credit and for borrowers take on more debt.

"No one can predict when, or how fast, rates will start to climb (or indeed, whether they will fall further)," Julie Dickson said in prepared text of a speech she delivered at the summit. "Yet dependence on low interest rates can become significant, meaning that transition to higher rates could be very painful."

So is it a soft landing or crash? Even though it's been many months since Ottawa clamped down on mortgage-lending rules the debate still rages. "This is very unprecedented. Normally when we see a significant drop in sales volumes -- and it's been very significant, it's been double digits in most markets -- when we've seen that, following three to six months later we normally see a significant drop in prices. And we haven't seen that yet," says John Andrew, a real estate professor at Queen's University.

It seems likely rates will stay low for a while longer yet so making a move now in the house market is probably a safe bet, on the assumption rates will climb higher that makes number crunching household budgets increasingly crucial. More hints will likely to be dropped next week when the Bank of Canada makes its rate announcement and market experts comb through the central bank's policy statement for another piece of the puzzle and clearer way forward.