What’s in store for Canada’s housing market?

The housing boom is predicted to slow down next year because of price declines in condominiums in Toronto and Vancouver, according to a Reuters poll. This could increase the risk for broader economic slowdown around the country.

Nationally, Canadian house prices will rise 2.0 per cent this year, but are predicted to stall next year with a 1.5 per cent gain, according to the poll.

Since January 2009 housing prices have increased by 37 per cent, and housing prices in Canada’s largest city and financial capital are are expected to rise 6.6 per cent this year – after Toronto saw a rise of 10 per cent in 2011 – but that will be quickly followed by a decline of 0.2 per cent, the first fall since 2008.

In Vancouver, prices will fall by 1.6 per cent this year, and 2.5 per cent in 2013.

Canada’s housing market avoided the boom and bust in the United States that started the global financial crisis because its banks are more conservative and closely regulated – requiring higher deposits for mortgages.

The housing boom helped pull Canada out of the global recession faster than other countries, but also created fears of a major correction in the future.

Many Canadians have taken on high debt loads to finance house purchases because of the rock bottom interest rates that were available. This means household debts are now reaching the level the United States experienced before the housing meltdown.

“Whether or not Canada will face a hard landing will be determined by whether or not household risk was correctly priced in the first place. In other words, when Canadians show up to refinance their mortgages, if their interest rates jump and/or the terms of their loans change dramatically, then households could default at a rapid rate,” economist Bricklin Dwyer at BNP Paribas told Reuters. “If the demand for housing slows too quickly, then homeowners could quickly find themselves underwater and promoting a dangerous cycle as they try to unload their home.”

The Bank of Canada noted just last week that the threat of a correction to the housing market is one of the biggest risks to the Canadian economy.

In their semi-annual Financial System Review, they wrote, “The continued high level of activity and stretched valuations in some segments of the housing market are of increasing concern.”

For the survey, Reuters polled Canada’s independent analysts, big banks, and international participants. National Bank Financial declined to participate, as did CIBC.

Finance minister Jim Flaherty recently announced four new mortgage rules to help counterbalance the overheating market:

-He will reduce the maximum authorization period from 30 years to 25 years.

-The maximum amount of equity homeowners can take out of their homes will be reduced to 80 per cent from 85.

– To ensure taxpayer backed mortgages are not going to the wealthy, availability of insured mortgages will be limited to homes with a purchase price of under 1 million.

-To ensure the size of a loan is not too big in comparison to household income, the maximum gross debt service ratio will be fixed at 39 percent and the maximum total debt service ratio at 44 per cent.

“We want people to make sure that when they purchase the most important purchase they’ll probably ever make in their life, that they do so in a prudent way. And some calming of the market is desirable,” he said in Ottawa, when he announced the changes.

It will also mean that some people will buy less into the market, so they’ll buy a less expensive home or a less expensive condominium. Good. I consider that desirable,” he continued. “So if it has that kind of a cooling effect, that to me is a good thing.”

Sources: Reuters, Financial Post, Toronto Sun, Globe and Mail

Photo ©iStockphoto.com/querbeet

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