U.S.-Style Home Price Correction Unlikely in Canada
OTTAWA, May 26 /CNW Telbec/ - The Canadian Real Estate Association
(CREA) released a new report today indicating that home prices will
stabilize, and will remain stable for some time. This means that
Canadian homeowners are unlikely to experience a U.S.-style decline in
the value of their homes.
"The relationship between average price and income has recently been
cited as portending a U.S.-style correction in Canadian home prices,"
said Gregory Klump, Chief Economist, CREA. "However, such warnings
ignore the longer-term relationship between prices and income, and
disregard typical Canadian housing market cycle dynamics."
Home prices tend to rise in cycles, characterized by periods of sharp
growth and periods of stability. By contrast, income generally follows
an orderly upward trend over time. For home prices to keep pace with
incomes, they must rise faster during housing booms to make up for
periods of little or no price growth. Canadian home prices were stagnant
throughout most of the 1990s, while incomes continued rising, making
housing more affordable. Over the past decade, home prices have climbed
sharply as mortgage interest rates declined.
Klump adds: "The Canadian housing market is now widely thought to be at,
or very near, the top of a cycle, and the ratio of home prices to
incomes is currently high. This ratio will revert to its long-term
average as it always does as part of a normal housing market cycle.
History suggests, however, that it will not do so by means of a
significant correction in home prices. The more likely scenario is that
home prices will stabilize, giving incomes a chance to catch up again."
The correction in U.S. home prices has sparked fears that Canadian home
prices may share a similar fate. However, according to Klump, "warnings
to this effect ignore solid Canadian mortgage market trends."
Conservative lending practices in the mortgage industry combined with
prudent borrowing and accelerated payments among Canadian mortgage
holders have been seen throughout the recent housing market cycle.
Accelerated accumulation of home equity will provide options for the
small proportion of homeowners who may face financial difficulty when
their mortgage is renewed at a higher interest rate. These trends are
expected to help Canada avoid a U.S.-style housing crisis.
The correction in U.S. home prices is set against a massive oversupply
of homes due to distress sales, combined with a drop in housing demand
due to unemployment. The unwinding of the housing boom in Canada will be
more orderly, characterized by softening sales activity and stable prices.
To view the full report please visit:
http://www.crea.ca/public/news_stats/pdfs/housing_report_2010.pdf