Will Canada’s housing boom end with a whimper or a bang?

 

Sizzling hot markets in Toronto and Vancouver have fuelled a lot of debate lately about whether Canada’s housing

market is overheated — and the jury is still out.

Gluskin-Sheff economist David Rosenberg came down on the side of whimper today, after expressing concerns

just last week that Canadian housing prices were looking unsustainable. The latest data from the Canadian Real

Estate Association appears to have changed his mind.

 

“Prices are starting to deflate by 0.8% YoY, though more like air coming out a balloon slowly than a giant pop,”

wrote Rosenberg Tuesday in his morning note.

 

“It is gradually becoming a buyer’s market with the inventory of unsold homes rising to six month’s supply, which

is at the edge of a balanced market.”

 

Existing home sales dropped 1.3% in June from the month before and were down 4.4% from a year ago. A big

part of the contraction was a 27.7% decline in the once heady Vancouver market and 7.9% slide in Toronto’s.

 

As tighter mortgage rules in Canada bite, sales and prices are likely to erode further, he said.

 

The new rules — introduced last month by Finance Minister Jim Flaherty to curb both a possible housing bubble

and Canadians’ ballooning household debt — are equivalent to a 1% mortgage rate rise in dampening the

market, he said.

 

They include:

• Borrowers will be allowed to use up to 80% of their property’s value as collateral for home-equity loans, down from 85%.
•  The maximum amortization period dropped to 25 years from 30 years for government insured mortgages.
•  Government-backed mortgage insurance will be limited to homes with a purchase price of less than $1 million.

Canada’s housing correction could see prices fall another 10% (some economists expect 15%) said Rosenberg,

which could send some mortgage holders into a negative equity position.

 

But there is a silver lining for first-time homeowners, he said, who have been shut out of the market by the sharp

price run-up in recent years.

 

Not everyone is convinced, however. Capital Economics in its global outlook Tuesday said the housing market still

looms too large in the Canadian economy for comfort.

 

Housing investment accounts for a near record 7.2% of overall GDP and “when the bubble bursts, we suspect the

contraction will be severe,” Capital economists said.