Canada's Housing Bubble

Dec 12, 2010 Steve Ladurantaye theglobeandmail.com

The Canadian housing market has managed a rare feat, TD Bank says, avoiding both a “bubble and a crash” over the last three years as the sector gyrated wildly.

In a report from its economics department Thursday, the bank said that the Canadian housing market has pulled off a soft landing and likely hit bottom in July. And having pulled off that rarest of feats, the bank now expects “modest price softness for the next year.”

“A more modest reaction on the supply (listings) side of the market and an improving economy will provide some partial offset to higher borrowing rates,” the report stated. “Markets should remain fairly balanced, limiting the extent to which home prices will move. After turning in another solid gain this year, we predict a bout of modest price softness over the next two years.”

While sales have picked up since July’s trough, the bank said that likely will only last until the middle of next year, when interest rates begin to move higher.

“As sales flatten out and start to slow over the course of 2011, and with listings expected to stay contained, we expect prices to find a near-term ceiling over the next few quarters,” the report stated. “Subsequently, a softer market balance will likely result in a modest price drop of 3-5 per cent (peak-to-trough) in late 2011 and early 2012 before prices stabilize later in the year.”

The report also looked at how close the market came to crashing, and whether people were right to be concerned:

“In the midst of the global financial crisis which hit its apex in the fall of 2008, some worried that Canada might be in store for a U.S.-style housing crash. As we argued, that fear proved to be unfounded. The market experienced a severe downturn in 2008 during which time the average resale price dropped by 13 per cent (peak-to-trough), but it rebounded in quick fashion.

In July 2009, only six months after hitting bottom, the average price was already back to its pre-recession peak. Mortgage rates at record lows and lower prices set the stage for that unprecedented turnaround. By the end of 2009, the average price had climbed another 6 per cent. As a result, concerns did a complete U-turn, shifting towards the risk that a housing bubble was brewing.

Had the 2009 rebound been sustained for longer, we may well have agreed. But, as expected, it did not last. Sales peaked at year-end 2009, and the average price followed in April 2010. During the first half of this year, sales gave back most of their gains.

This was consistent with our view that the 2009 rebound front-loaded activity and borrowed from future demand. Meanwhile, listings retreated and kept the market balance in check, preventing a steep price drop.

As of the second half of this year, the market was already experiencing a nascent rebound.”