U.S.-Style Home Price Correction Unlikely in Canada...

By
Real Estate Sales Representative with for real estate results in the Tri-Cities.

U.S.-Style Home Price Correction Unlikely in Canada

May 26, 2010 - The Canadian Real Estate Association (CREA) released a new report today indicating that home prices will stabilize, and will remain stable for some time. This means that Canadian homeowners are unlikely to experience a U.S.-style decline in the value of their homes.

“The relationship between average price and income has recently been cited as portending a U.S.-style correction in Canadian home prices,” said Gregory Klump, Chief Economist, CREA. “However, such warnings ignore the longer-term relationship between prices and income, and disregard typical Canadian housing market cycle dynamics.”

Home prices tend to rise in cycles, characterized by periods of sharp growth and periods of stability. By contrast, income generally follows an orderly upward trend over time. For home prices to keep pace with incomes, they must rise faster during housing booms to make up for periods of little or no price growth. Canadian home prices were stagnant throughout most of the 1990s, while incomes continued rising, making housing more affordable. Over the past decade, home prices have climbed sharply as mortgage interest rates declined.

Klump adds: “The Canadian housing market is now widely thought to be at, or very near, the top of a cycle, and the ratio of home prices to incomes is currently high. This ratio will revert to its long-term average as it always does as part of a normal housing market cycle. History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again.”

The correction in U.S. home prices has sparked fears that Canadian home prices may share a similar fate. However, according to Klump, “warnings to this effect ignore solid Canadian mortgage market trends.”

Conservative lending practices in the mortgage industry combined with prudent borrowing and accelerated payments among Canadian mortgage holders have been seen throughout the recent housing market cycle. Accelerated accumulation of home equity will provide options for the small proportion of homeowners who may face financial difficulty when their mortgage is renewed at a higher interest rate. These trends are expected to help Canada avoid a U.S.-style housing crisis.

The correction in U.S. home prices is set against a massive oversupply of homes due to distress sales, combined with a drop in housing demand due to unemployment. The unwinding of the housing boom in Canada will be more orderly, characterized by softening sales activity and stable prices.

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Comments (5)

Terry Chenier
Homelife Glenayre Realty - Mission, BC

John,

I believe we are in for a semi-major correction in pricing. Sorry to be au contraire.

Jun 02, 2010 06:32 PM
John Grasty
for real estate results in the Tri-Cities. - Port Moody, BC
Your Tri-cities REALTOR, neighbour and volunteer.

Did you read the report by chance: http://www.crea.ca/public/news_stats/pdfs/housing_report_2010.pdf?

This is significant: "...the relationship between average home price and income in British Columbia may have changed in recent years due to international immigration and positive net inter-provincial migration." This is like guaranteed new demand (Buyers).

The big unknown is how much new inventory developers will put into the mix, and whether there will in fact be many future mortgage defaults if rates go up.

Jun 02, 2010 07:24 PM
Brian Madigan
RE/MAX West Realty Inc., Brokerage (Toronto) - Toronto, ON
LL.B., Broker

The correction which is normal and predictable will occur soon. But, that will be followed by a resurgence in the Fall.

Jun 03, 2010 01:01 AM
Kathy Clulow
RE/MAX All-Stars Realty Inc. Brokerage - Uxbridge, ON
Trusted For Experience - Respected For Results

I suspect there will be a slow down in new home sales for a short period due to the HST this may add to the demand for resales thus smothing out any "anticipated" price "correction". A local Financial Planner in commenting on the recent rate hike felt it was necessary so that the Feds had wiggle room if they needed to drop rates to stimulate the marketplace.

Jun 18, 2010 01:10 PM
John Grasty
for real estate results in the Tri-Cities. - Port Moody, BC
Your Tri-cities REALTOR, neighbour and volunteer.

I like the way you think Kathy; interesting thoughts and certainly plausible.

Are you aware of an Ontario source that reports combined new homes available with re-sales available (a total inventory/supply figure) for sale?  BTW, this total supply figure is elusive in BC.

Jun 19, 2010 11:13 AM

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