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Predictions of a Bursting Housing Bubble

Posted by: admin in CMHC, CCPA, Canadian Real Estate on Aug , 2010

bubbleWill the bubble burst or won’t it? The Canadian Centre for Policy Alternatives is suggesting Canada’s housing markets could be poised for a big crash akin to the US housing meltdown, but the Canada Mortgage and Housing Corporation is painting a rosy picture and predicting more starts and modest price increases in 2011.
The CCPA made a big splash in the headlines today when they released a report that suggested property values in some markets could drop up to 38% in less than three years. The cities hardest hit from a massive housing correction would be Edmonton and Montreal, but Vancouverites would stand to lose the most – nearly $200,000 on the average home if the CCPA’s worst case scenario predictions are true.
"The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen," according to David Macdonald, author of the report. The report went on to speculate that at best, Canadian markets were long overdue for a correction, and at worst a full US style market collapse.
Meanwhile, the CMHC’s chief economist Bob Dugan forecast that resales of existing homes would stay practically flat during 2011. The Corporation is predicting between 450,000 and 785,700 resales in 2010 and an average of 456,000 resales in 2011. The CMHC also slightly revised its housing starts estimate – 184,900 units for 2010, very slightly up from the previous estimate of 182,000 units. On the price front, the CHMC is betting more restrictive lending rules and increasing interest rates will deflate any housing bubbles and keeping prices stead in 2010 with minor increases in 2011.
However, even bank economists feel that some markets may be overheated. In a Toronto Sun article, Benjamin Tal, a senior economist and real estate expert at CIBC World Markets expressed concern that markets were “overshooting”. While he was unwilling to use the word bubble, he did say that prices are headed for a drop.
According the CCPA report, the average house price has far exceeded median family incomes, and that spells trouble. Prices for an average family home range anywhere from 4.7 to 11.3 times a family’s annual income – whereas only 10 years ago, they averaged between 3 and 4 times the price. While sales are down (as much as 40% in some markets) prices continue to remain steady, even as interest rates creep up.  The CCPA has warned that even a modest interest rate increase of 1.25 % would push many over-burdened mortgage holders over the edge and trigger a US style housing crash.
Whatever the case is, with even banks feeling cautious and the HST causing uncertainty in two of Canada’s largest housing markets, any potential homeowners should carefully consider their options before taking the plunge.
Sources:

Picture:
Reini68, Flickr

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