February 4, 2011
Nothing complements a Friday afternoon like a bleak real estate market outlook.
Capital Economics, an international macroeconomic research firm, warns in a gloomy new report that the housing market is likely going to suffer the sort of crash that we witnessed recently in the United States.
As the Globe and Mail reported yesterday, the study argues that, as the Bank of Canada raises interest rates, increasingly expensive mortgage rates combined with inflation could push home prices down 25 per cent over the next few years.
The Globe quotes Capital Economics economist David Madani who explains his firm’s sense of foreboding:
“Even small rises in official interest rates have been shown to have a big effect on homeowner confidence in other countries under similar circumstances as they can change perceptions toward the housing market very quickly. If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.”
But the report’s outlook is darker than most, and the Globe seemingly had no problem reaching analysts who tempered CE’s warning. A Bank of Nova Scotia economist is quoted as predicting that home prices will stay flat over the next few years. The Canadian Real Estate Association predicts that though sales will drop by 9 per cent this year, prices will fall by a more modest 1.3 per cent.
And, interestingly, even if variable-rate mortgages became more expensive, a recent survey by the Canadian Association of Mortgage Professionals suggests that almost all Canadian home-owners are confident that they could shrug off the increase.
Though we suppose that the experience of the United States illustrates the perils of trusting that your neighbours know what, exactly, they can afford.
Anyway, happy weekend!