Housing market to continue to slow, but not plunge

Another hike in borrowing costs Wednesday is likely to further soften Canada’s housing market, but a major think-tank says the slowdown in recent months won’t produce a “free-fall” in demand.

Another hike in borrowing costs Wednesday is likely to further soften Canada’s housing market, but a major think-tank says the slowdown in recent months won’t produce a “free-fall” in demand.

The Bank of Canada raised its policy rate another quarter point — the third such increase in just over three months — and the banks bumped up their prime rates by the same amount, pushing up the costs of short-term loans linked to prime.

That means variable rate and line of credit borrowers are going to see their carrying costs rise modestly again this month as the Bank of Canada rate now sits at one per cent and bank prime rates at three per cent.

“People aren’t panicking yet, there isn’t a need to panic yet … it’s still a very low rate historically,” says Heather Paterson, senior mortgage agent at Invis mortgage brokerage.

“You can carry your mortgage at a fairly low payment at this point in time.”

The housing market has slowed considerably after a rapid acceleration at the beginning of the year as people rushed to lock in historical low mortgage rates when the policy rate was just 0.25 per cent.

But prices remain sky high, which has led some economists to discuss the possibility of a housing bubble in Canada that could soon burst into a U.S.-style housing crisis. Homeowners south of the border have seen the price of their properties fall as much as 30 per cent.

But the Conference Board of Canada says it sees a pause in the real estate market — not a U.S.-style collapse — after a surge in prices for the last several years in most Canadian cities.

“The housing market has lost its lustre,” Mario Lefebvre, director of the board’s Centre for Municipal Studies, said in a report Wednesday.

“No doubt about it. However, this will not lead to a free-fall for Canada’s housing market. This country will not experience home price declines to the tune of what we have witnessed in the United States over the past few years.”

In the United States, the housing bubble burst mainly because of risky lending practices by major banks, which saddled them with hundreds of billions of dollars in bad loans that eventually led to widespread foreclosures and the collapse of many regional banks and some Wall Street financial companies.

The troubles in the U.S. financial industry sparked the recession and reverberated across Europe and other parts of the world.

However, Canada’s market is very different from our southern neighbours, Paterson said.

The recent interest rate hikes, as well as tighter mortgage lending rules enacted in April, have led to a more balanced market, not one where sellers are going to see the price of homes erode dramatically, she said.

“Housing prices are stable, they’ve come down slightly and interest rates are still really really low. If you were to take a fixed rate today I don’t think you would kick yourself for locking into a four per cent,” she added.

She says interest rates are going to be higher in the next few years, but housing prices will stay steady.

“We can’t sustain that steady increase, bidding wars and people paying $100,000 over asking, but we’ve come into a more balanced and levelling out period … we won’t see a huge drop but we won’t see a huge spike either.”

In its report, the Conference Board predicted weaker new home and resale housing sales in Canada over the next several months because of slower economic growth, the impact of new harmonized sales taxes in Ontario and B.C. on July 1 and eroding consumer confidence.

“But we’re not the U.S.,” asserted Lefebvre.

“The house price bubble in the United States came about due to elements that have less to do with economic fundamentals than with U.S.-specific laws, like mortgage deductibility for tax purposes and the ring-fencing of mortgage debt, which prevents lenders from pursuing the other assets of the borrower.

“If anything, Canada will see a pause in home price growth with possible marginal declines in a few markets, but nothing near what the United States has been through.”

In recent weeks, economists have debated how far the Canadian housing market will fall — with some predicting a sharp decline and others expecting only moderate price drops.

The Conference Board noted that the recent resale housing numbers are not good, with sales down in 26 of Canada’s 28 largest urban centres in July and in 18 of 26 in June.

Year-over-year sales dropped in all 28 markets in July, with declines ranging from 3.5 per cent in Trois-Rivieres, Que., to 48.5 per cent in the Fraser Valley in southern B.C.

The annual decline in existing home sales has been particularly large in Ontario and Western Canada and less pronounced in Quebec and Eastern Canada, the board report said.