Yet another economist is stepping up to defend the health of Canada’s housing market ahead of the critical spring/summer selling season and as a new finance minister is put in charge of avoiding a U.S.-style meltdown.
In a new report, the Conference Board of Canada says the housing market here is headed for “a modest decline,” but not the crash critics have long been calling for.
"The housing market may be undergoing a correction in some regions and market segments, but it is more likely to be a soft landing than a bubble bursting,” economist Robin Wiebe says in promoting the Conference Board report titled, “Bubble Fears Overblown.”
Wiebe argues that mortgage costs, not house prices, are behind most buying decisions these days. Buyers decide on how much they are able to afford, not how much higher house prices are heading.
“Ongoing employment and population growth will continue to bolster housing demand, “ Wiebe adds.
It’s the slow, but steady rise in those rates that will slow the market, Wiebe says, but it won’t be anything dramatic. That’s because Canada’s economic growth is still sluggish and rates will need to be kept at bay to prevent a reversal in that trend.
What’s more, Wiebe says Canada’s “more prudent” mortgage rules make it less susceptible to a rise in defaults, which was a big problem in the U.S. housing crash a few years back, from which the country is still recovering.
The report is the latest in a growing list of studies refuting forecasts that Canada has one of the most overheated housing markets in the world. For example, the Organization for Economic Co-operation and Development (OECD) believes Canada’s market is about 30 per cent overvalued, while others have pegged it at up to 60 per cent. Their predictions are based on measures such as the profitability of owning a house (price-to-rent ratio) and the measure of affordability (price-to-income ratio).
Economist Will Dunning was even more optimistic in a report released earlier this month suggesting Canada’s housing market is actually undervalued.
Dunning, who it should be noted is the chief economist for the Canadian Association of Accredited Mortgage Professionals, argues the doomsayers are using “wildly inaccurate estimates,” in their methodology.
The Conference Board isn’t quite as rosy in its outlook. It believes population and job growth and modest mortgage rate increases will limit price increases this year and next.
“Further out, rising interest rates could crimp affordability, leading to a modest medium-term price adjustment,” Wiebe’s report says.
“So, while there are areas of higher risk, like the Toronto condominium market, a soft landing for the housing market appears to us the most likely scenario.”
The housing market will be near the top of the agenda for freshly minted finance minister Joe Oliver, who took over the portfolio from Jim Flaherty last week.
Flaherty has been cautious when it comes to the housing market. He tightened mortgage insurance rules four times in four years up until mid 2012, and repeatedly warned Canadians about taking on too much debt.
Weeks before leaving the post, he said the government would further tighten mortgage rules if necessary, and that the government is aiming for the “soft landing” in the market that many predict.
“We look at debt-to-net worth,” he told CTV’s “Question Period in January, according to a report from Bloomberg News. “As long as the housing market remains relatively strong we don’t really have a debt issue.”
Canadians will be interested to see if Oliver, a former investment banker, takes the same tone and how he’ll approach one of Canada’s most controversial sectors.