There’s nearly a one-in-three chance that Canadian home prices go “bust” within two years, Goldman Sachs says in a new report.
The American financial firm has based this estimate on its “busts” model, which considers debt, inflation, long-run house prices, GDP growth, what share residential investment makes up of the national GDP, and the ratio of house prices to rent.
Using this framework, Goldman Sachs suggests the probability of Canadian house prices falling by at least 5 per cent is 30 per cent.
Goldman Sachs says Canada is overbuilding homes beyond the level that demographic demand would support. But researchers emphasize construction varies from market to market in Canada.
“We would stress that in the case of Canada — a focus for many investors at the moment — there are important regional disparities to keep in mind,” write Goldman Sachs researchers Zach Pandl and Nicholas Fawcett.
“We do see an excess of vacant housing, but primarily in Saskatchewan and Alberta, where declines in potash and oil prices, respectively, resulted in concentrated local housing shocks,” they add.
Canadian housing starts are trending more than 10 per cent higher than needed to meet demand, according to the report.
Goldman Sachs also looked at five other markets that are among the smaller G10 economies (Australia, Norway, Sweden, New Zealand, and Switzerland) and evaluated the chances of their respectively housing markets going bust.
A house-price bust in the next two years is more likely in Sweden or New Zealand, where there’s a 35 to 40 per cent chance of prices falling in the range of 5 per cent or more.
In Australia, Switzerland and Norway the chances of that sort of downturn are between 20 and 25 per cent.
Researchers admit their model isn’t without fault. “It has a few drawbacks,” Pandl and Fawcett say.
For one, it’s a bearish model prone to predicting housing busts too frequently. “Moreover, the model does not tell us what will happen to real activity as house prices decline,” researchers add.
And another shortcoming: it doesn’t provide a clear picture of what the implications are for a country’s broader economy.
“In general, we do not expect imminent problems in the G10 real estate markets, but current imbalances could exacerbate cyclical weakness down the road,” the researchers say.