I’ve just read “Assessing Vulnerabilities in the Canadian Housing Market,” a five-page report written by CIBC economist Benjamin Tal and released on May 25. If you’re looking for some reassurances that the bottom isn’t about to fall out of the Canadian housing market, you may appreciate Tal’s assessment.
Mr. Tal clearly feels that Canadian housing is overvalued but he doesn’t think there is an unmanageable affordability problem in Canada.
First, Tal believes that “at least 1.5 million houses in Canada are overvalued” and his research indicates that prices on those properties are inflated by as much as 14%. Provincially, British Columbia is the worst with an over valuation of 20.7% and Alberta is the least inflated at 8.6%. Saskatchewan fits neatly between the two at 13.2%, just below the national average.
Tal goes on to say that the market is showing clear signs of cooling and that price growth has “rapidly decelerated” over the past few months. He goes on to suggest that absent a “trigger” to a violent correction, prices will not necessarily crash. According to Tal, rising rates will not be the trigger some believe it to be. He speculates that rates will climb slowly and that most Canadians will be able to manage the costs associated with those changes.
According to Tal and CIBC’s affordability index, which is based on actual transactions as opposed to “synthetic mortgage” assumptions, we can afford it. On average, Canadians are using just 15.6% of their income to make mortgage payments. “Manitoba and Saskatchewan still enjoy the best home ownership affordability in the nation” with just less than 12% of income being used on to service mortgage debt.
The report concludes by saying, “While higher interest rates will clearly erode affordability, our detailed look at the distribution of mortgage payments as a share of income does not reveal major pockets of vulnerability. Accordingly, the most likely scenario is that higher interest rates will lead to a modest decline in prices (probably in the magnitude of 5%-10%) in the coming year or two. But given relatively modest rate hikes and the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years—paving the way for a healthier housing market by mid decade.”
What do you think? Read to full report here.
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