Some people interpret this weakness as a sign that a housing crash has started – see, for example, the Canadian Business article “Canada’s housing crash begins.” I don’t see a collapse in 2013 for several reasons. One is the highly supportive monetary environment.
In
the case of the U.S. housing boom from 2003 to 2007, the overvaluation was
pricked after the Federal Reserve dramatically tightened monetary policy to
cool off an overheated economy. This catalyst is absent in Canada as 2013
commences.
Indeed,
monetary policies in Canada, the U.S., Japan, China and elsewhere around the
world are dialled to the opposite extreme. They are hyper-expansionary, with
interest rates at record lows and printing presses running like never before.
This
means that Canada and other countries should continue generating growth in jobs
and income. Since higher employment and income typically support housing
markets, prices are not likely to fall much in 2013. Or if they do, they
shouldn’t stay down for long.
The
crash crowd says Canadian houses are overvalued on the basis of the
price-to-income ratio. So they fear the process of mean reversion will take
prices down by 25 per cent or more. But with so much monetary stimulus in the
system, the price-to-income ratio should also be normalized by income
increases.
Interest
rates may begin edging up later in 2013. They shouldn’t threaten the housing
market because income and employment will be climbing as well, creating
offsetting demand for housing. Similarly, the one-off impact of a tightening in
mortgage rules during 2012 should not be cause for a serious setback.
There
are other reasons for expecting a crash to be a no-show in 2013. Suffice it to
say that the monetary cycle suggests a soft-landing scenario. This is not to
deny there are pockets of extreme overvaluation or oversupply, where the risk
of substantial correction remains. Cases in point could be Vancouver housing
and Toronto condos.
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