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Soaring home prices and overvaluation aren’t the main risks to Toronto and Vancouver’s heated housing markets. According to a recent report from Central 1 Credit Union, the real threat is a recession.

“High prices and overvaluation will not cause a housing correction,” explained Helmut Pastrick, Central 1’s chief economist, in the credit union’s commentary published yesterday. “No housing recession in Canada or elsewhere has been caused by high prices alone — something triggers the recession and consequent price decline.”

The economist says factors like price and overvaluation can increase a market’s vulnerability. “Usually markets with the fastest price growth prior to the recession undergo the steepest price declines during the recession,” he pointed out. But he adds these factors aren’t outright risks in the way that a recession which would expose these potential weaknesses, is. Prices in Toronto and Vancouver will continue to rise, the economist says, until a recession hits.

Rather than dwelling on prices, Pastrick suggested observers look to the root cause of housing market corrections. In Calgary, the collapse of the energy sector due to a sharp drop in oil prices has led to a housing market correction.

“[Calgary] housing sales have fallen by more than 30 per cent from the peak to the latest reading,” said Pastrick. Had analysts forecast the swing in the natural resources value, this decline could have been predicted, he said.

“Most if not all, forecasters missed that one and they will not likely accurately predict the timing of the next economic recession either. Nonetheless, more effort is needed to incorporate economic recession risks into housing market risk assessments.”

Pastrick cited last month’s CMHC Housing Market Assessment report as an example of how looking merely at real estate factors including price growth, overvaluation, overbuilding and overheating is not sufficient for an accurate reading of a market.

He notes that the CMHC report used these factors to evaluate the risks facing markets across the country and concluded that evidence of problematic conditions in Calgary’s market was “weak.” Yet, as Pastrick underscored, housing activity dropped off there. “Obviously, the metrics used cannot identify a housing recession, which is the most important risk factor,” he said.

“The metrics used in the CMHC report are more suited to identifying hot and cold markets.”

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