First-time homebuyers, concerned they may be buying into an oversold market that could melt down in a U.S.-style housing slump, may be reassured by the recent conclusions of an RBC Economics report on the state of the Canadian housing market. “Fears of a Canadian housing market crash [are] overblown,” according to a recent market report authored by RBC senior economist, Robert Hogue.
Mr. Hogue acknowledges that a sharp decline in the number of existing home sales since the beginning of 2010 has “ignited fears that the Canadian [housing] market has started to crash.” He observes that such concerns “are based on the belief that the spectacular run-up in prices in the past several years reflected bubble-like conditions, which will inevitably end in a gut-wrenching correction.”
While agreeing that “housing prices are historically elevated,” Mr. Hogue notes that the RBC’s analysis does not show “that any major slump will necessarily ensue.” In comparing current housing affordability with affordability in the late 1980’s and early 1990’s when housing markets slumped, he notes that current housing affordability (while inflated) remains “much better” than it was in the late 80’s-early-90’s.
Mr. Hogue’s forecast predicts that “home prices, overall, are generally expected to stay above water in Canada, although there are some local markets, such as Vancouver and, possibly, Montreal, where very poor affordability could well lead to declines to correct these imbalances.”
Mr. Hogue acknowledges that the run-up in housing prices from 2001 “far exceeded household income growth,” and that the rapid recovery from a short-term downturn in late 2008-early 2009 has fuelled speculations “that the Canadian market is being driven by irrational behaviour” – such ‘irrational behaviour’ being the classic hall mark of financial bubbles.
Mr. Hogue reports that current market conditions show “little compelling evidence of irrationality or bubbles in the overall Canadian market relative to historical patterns.” He notes that “(t)he best measure of underlying stress – housing affordability – does not flag any major misadjustment with respect to prices.” In comparing historic affordability data, Mr. Hogue concludes that, “(a)t most [a comparison of housing affordability] points to a moderate degree of over-stretching on the part of Canadian households – something that can be righted in time without causing a significant disruption to the market.”
First time home buyers may be reassured by the report from RBC Economics that they are not buying into a housing bubble. Rather, first-time purchasers may now be able to take advantage of both a buyer’s market and mortgage rates that are still well below historic levels. Consulting a well-networked mortgage broker will help ensure that a new homebuyer is getting the best available rates in an increasingly competitive market.
