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The Housing Bubble Debate Continues

 

Here’s something to set the clock for: the bursting of Canada’s housing bubble.

 

Economist David Madani at Capital Economics has a time line for the drop in housing prices, figuring there will be an outright decline starting next year. The firm’s forecast isn’t pretty. It’s looking for a drop in prices of 25 per cent.

 

Most people figure Canada’s housing market is in the midst of a soft landing and will avoid a painful denouement, such as in the U.S. Activity is cooling a bit and housing prices seem to have plateaued, but not gone into reverse.

 

But Mr. Madani thinks this is the calm before the carnage. In a recent note to clients, he says the market is in a stand-off period that typically comes at the end of a housing bubble. This is when prospective buyers refuse to meet the price of sellers, who in turn are refusing to cut their asking price.

 

“Eventually it begins to dawn on sellers that the market has shifted and, as they become more desperate, they eventually agree to lower their asking price. But until that happens, any stagnation in prices can be interpreted as a successful soft landing,” he says.

 

Mr. Madani says housing bulls have all manners of rationalizations to convince themselves that prices will only rise. Among them are foreign buyers, immigration, and shortages. Moreover, continued household formation will always be around to provide a prop to prices.

 

These rationalizations might be about to confront realityAccording to Mr. Madani, house prices react to changes in demand with a lag of five to nine months. That’s ominous because of recent sales trends. Sales in Vancouver are down almost 28 per cent. In Toronto, they’re off 8 per cent, while they’re unchanged in Montreal.

 

“Overall, the willingness of buyers to pay these historically high house prices now looks to be proving fragile against the increasingly disappointing macroeconomic backdrop. The housing bubble in Vancouver already appears to be deflating, with only Toronto defying the inevitable. Accordingly, we expect substantial declines in house prices over the next year or two,” Mr. Madani says.

 

www.theglobeandmail.com

 

 

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