Canadian real estate market stable & unlikely to see a US style price corrections, report suggests
A US style property price correction scenario is unlikely to happen in Canada with the real estate market set to remain stable, according to new research.
The property market is widely regarded as being at, or very near, the top of its cycle and experts expect it to be stable for some time, says the report from The Canadian Real Estate Association.
‘The relationship between average price and income has recently been cited as portending a US style correction in Canadian home prices. However, such warnings ignore the longer term relationship between prices and income and disregard typical Canadian housing market cycle dynamics,’ said Gregory Klump, Chief Economist at CREA.
Residential property 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,’ he explained. For property 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.
‘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,’ explained Klump.
Warnings that Canadian home prices may share a similar fate to the US ignore solid Canadian mortgage market trends as 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, he said.
He believes that an 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.
He also points out that the correction in US 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.