Canada’s housing market: ‘Slowdown postponed’

Housing outlook
A new report on Canada’s housing market carries this notable title: “Slowdown postponed.”

The report from National Bank Financial is in line with other forecasts, projecting the market will slow in 2012 and 2013, but it won’t crash. National Bank’s Shubha Khan also upgraded his projection for this year because of a stronger-than-expected third quarter and a longer-than-expected timeline for interest rate hikes in Canada.

“Given the resulting deterioration in the global economic outlook, the Bank of Canada is now expected to leave its policy rate unchanged until late 2012 or early 2013,” Mr. Khan said.

“Mortgage rates will almost certainly linger near their current historical lows for at least the next 12 months, which should prevent a pronounced slump in housing market activity. We previously expected rate hikes would materialize as early as [the fourth quarter of] 2011.”

Mr. Khan projects an 8-per-cent gain in the dollar value of home sales this year, a 3-per-cent dip in 2012 and a 5-per-cent decline a year later.

“Given our interest rate outlook, housing affordability is projected to be stable through 2012, which suggests that home prices are unlikely to adjust materially next year,” Mr. Khan added in a discussion about the debt service ratio, or DSR, for mortgages.

The DSR, or what’s needed in terms of a household’s disposable income to meet its monthly payments, now stands at 21.6 per cent, compared to a 20-year average of 20 per cent.

“In 2013, however, rising interest rates will result in a significant deterioration of the DSR … pricing many potential buyers out of the market unless (i) home prices decline or (ii) households’ appetite for credit expands (i.e. households tolerate a higher DSR),” he said in the report.

“With the weak global economy weighing on consumer confidence and non-mortgage credit at record levels, this appetite is unlikely to grow. Therefore, home prices will have to fall, in our view … we estimate that the average home price will have to decline by around 9 per cent from current levels if, as we expect, mortgage rates increase by 100 to 150 basis points in 2013.”

Michael Babad
Globe and Mail Update
Published Friday, Oct. 21, 2011