Fears of Canadian Housing Market Crash Overblown

September 3, 2010

Robert Hogue - Royal Bank of Canada Senior Economist

Summary

• The sharp decline in housing resale activity since the beginning of the year has ignited fears that the Canadian market has started to crash.
  
• In large part, such concerns are based on the belief that the spectacular run-up in prices in the past several years reflected bubble-like conditions, which will inevitably end up in a gut-wrenching correction.
  
• While we agree that housing prices are currently historically elevated, we do not believe that any major slump will necessarily ensue.
  
• Housing affordability – the best indicator of underlying market tensions, in our view – has deteriorated in recent quarters but remains much better than it was in the late 1980s and early 1990s when bubbles clearly caused the Canadian market to meltdown in the years that followed.
  
• The further expected modest erosion of affordability in the period ahead is seen to cool housing demand not deep-freeze it.
  
• Home prices, overall, are generally expected to stay above water in Canada, although there are some local markets,  such as such as Vancouver and, possibly, Montreal, where very poor affordability could well lead to declines to correct these imbalances. 

Bottom line
Affordability measures suggest that housing market fundamentals are comparatively stronger than those that prevailed in 1990, thereby minimizing the risk that a 1990s-style crash will occur.  Nonetheless, because the cost of homeownership is likely to remain higher than average, a slower pace of housing market activity and more subdued pricing environment than we have experienced from 2002 to 2008 and again during the second half of last year should be expected.

Read the details of this report (pdf)