Canadian housing prices, which have nearly doubled over the past decade, may finally be at a turning point.
Slowly rising interest rates, new taxes on foreign purchasers and government efforts to slow mortgage credit should pare price gains in the most overheated markets. We are confident, however, that policymakers will not cause what they are trying to prevent – a housing crash.
Our view that most Canadian housing markets are overvalued was reinforced by last week’s report from Canada Mortgage and Housing Corporation. But predicting the top of any market is tricky, and the Canadian housing market is no exception. The key is forecasting turning points in the underlying variables that created Canada’s overheated housing market:
- Mortgage rates. These are at all-time lows (see chart) but will likely rise slowly in the coming months and years. Barring an economic shock, we think the Bank of Canada will be reluctant to cut rates. If the economy requires further stimulus, an expansion of fiscal stimulus is more likely. We also expect further macroprudential policies aimed at slowing mortgage credit growth.
- Employment. Canada’s unemployment rate, which has hovered around 7% over the past three years, will likely remain steady thanks to continued modest economic and job growth. This will likely generate moderate demand for housing.
- Interest rates. We expect rates, near zero in real terms, will rise slowly, reversing the tendency of people to save less and “consume” more house (i.e., buy a more expensive home).
Location, location, location
Here’s our view on how specific markets will fare:
- Vancouver. A 15% tax on foreign buyers of property in Vancouver appears to have begun cooling off the high end of the market. We think Vancouver should have a meaningful correction in the next 12 months, which would be a healthy event.
- Calgary. We think housing will correct as the full impact of oil price declines works its way through the local economy.
- Toronto and Hamilton. These cities still have momentum and are unlikely to correct in the next year, but tighter mortgage credit should eventually stop house price increases.
Last year we wrote that Canadian housing prices should level off, and were surprised when mortgage rates fell. Given today’s historic low mortgage rates, we are more confident in our forecasts.
That said, your home is your castle, life is short, enjoy!
Ed Devlin is PIMCO’s head of Canadian portfolio management and a contributor to the PIMCO Blog.