Expect a ‘soft landing’ for condo development, housing market

Canada’s leading bankers expect the country’s real estate market, including condominium development, faces a “soft landing” even though the slowdown is affecting mortgage lending.

Speaking to a RBC banking conference in Toronto on Tuesday, the country’s top bankers said they don’t expect a dramatic downturn like one experienced by the United States about five years ago.

 

The bursting of the U.S. housing bubble is considered a major cause of the credit crunch that swept Wall Street and then the global economy in the fall of 2008, after interest rates on sub-prime mortgages rose and defaults soared.

 

By contrast, sub-prime mortgages have been less common in Canada and real-estate prices have trended upward for the most part — except for a few months during the 2008-9 recession and in some economically disadvantaged areas.

 

“Our expectation is that the overall real estate market in Canada is still relatively solid,” Royal Bank CEO Gord Nixon said Tuesday.

 

Despite reports that suggest Canadian housing is in crisis, he said the pullback is limited to a couple of markets, notably Vancouver.

 

“We have seen a slowdown in sales and we’ve certainly seen a slowdown in mortgage demand but price levels are relatively stable,” he added, noting that by most metrics other than debt to disposable income indicators are in line with historic standards.

 

“So our expectation is we’ve got this sort of soft landing scenario on the real estate side.”

 

The head of Canada’s largest bank said he expects RBC’s consumer lending growth will slow to mid single digits but it should see an increase in commercial loans.

 

Nixon said the bank has relatively small exposure to the condominium market at $1.2-billion of a $700-billion loan portfolio and has requirements that protect it from troubled lenders.

 

“We’re not overly concerned with respect to condo itself because our relative exposures are quite small — on a relative basis, the smallest of the Canadian banks,” he said.

 

However, Nixon noted that a significant decline in the overall real estate market would have broader impact across the economy which would hurt the banking industry.

 

While Nixon expressed confident with most parts of the bank’s businesses, he said RBC will focus on improving its underperforming Caribbean operations.

 

Bank of Montreal CEO Bill Downe told the conference that BMo limited its exposure to the Canadian condo construction market at $700-million after watching some of the problems surface in the United States in 2007 and 2008.

 

The bank is active in the U.S. mortgage lending market in the Midwest through its Harris Bank subsidiary.

 

He doesn’t expect Canadian homeowner debt to keep growing at previous levels but not an “outright collapse in the market.”

 

“In fact, house prices may just stagnate. Condominium prices may just stagnate for a couple of years. And that’s the definition of a soft landing,” Downe said.

 

Downe predicted the overall U.S. housing market will show considerable strength this spring, stimulating commercial loans.

 

After a strong fourth quarter with U.S. mortgages, Downe’s anticipating that the American economy will be much stronger this year, which will put upward pressure on interest rates in both countries.