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Is Our Housing Market Gearing Up for a Crash?

21 September 2012

This is a question that’s been asked around the country for the past two years. And, if you include the deepest years of the Great Recession, probably even longer than that. So, is our housing market headed for a crash? The research firm Capital Economics certainly seems to think so. While many have been predicting a 10 – 15 per cent drop in home prices over the next few years, Capital Economics has taken the very bearish view that they’ll actually drop by 25 per cent.

“Home sales have slumped in recent months,” they said in a note to clients. “Not just in response to the tightening of mortgage lending standards. We fear this adjustment is only just starting and anticipate that the resulting excess supply of homes for sale will eventually drive home prices down by as much as 25 per cent.”

Capital Economics says that they’ve used data from Canada Mortgage and Housing Corporation to deduce that 1 in 10 homeowners has less than 10 per cent equity in their homes. This means that should a drop of 25 per cent come, many Canadians would find their homes underwater. This is the same situation that many Americans found themselves in when their housing market completely collapsed.

But should that happen, it will affect more than just homeowners. Just like it did in the U.S. Capital Economics points to the fact that our residential investment used to average only 5.8 per cent of our GDP. Now it’s more than two percentage points above that, sitting at 7.3 per cent. And this would mean that our entire economy would be affected.

“There is a good chance that share will drop below its average, making it a significant drag on overall GDP growth in both 2013 and 2014,” Capital Economics said in their note.

They also point to the fact that because of the recent global economic slowdown, there is less demand for Canadian commodities. And our housing problem will only compound that.

There is good news for homeowners that won’t be underwater should that happen, though. The research firm also says that because of the drop in home prices, the Bank of Canada will be forced to at least keep interest rates where they are; and not raise them as they’ve been saying they intend to do.

“The bias policy makers have towards tightening policy looks, in our view, to be increasingly untenable,” they said.

But is any of this really true? Do we really have an “excess supply of homes for sale?” Maybe Capital hasn’t looked at the recent figures coming out of Toronto. Condos are being put on hold while developers try to sell the stock they have. And if you’re looking for a single-family home, you can forget it. With prices topping over $500,000 (and that’s for a basic single home,) coupled with a severe shortage of space, there are simply not enough homes for the people that want them – never mind an excess of supply.

What do you think? Is Capital Economics right, and we’re headed for a serious crash? Or have the new mortgage rules done their job, and put us right where we need to be? Let us know your thoughts through the comment section below, or by liking us on Facebook.

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