CIBC warns that a price correction of 5 to 10 per cent is likely within the next two years
Steve Ladurantaye Real Estate Reporter
Globe and Mail Update Published on Tuesday, May. 25, 2010 12:13PM EDT Last updated on Tuesday, May. 25, 2010 4:26PM EDT
Seventeen per cent of Canadian homes are overvalued, CIBC warned Tuesday, with a 5 to 10 per cent price correction likely to hit in the next two years.
With higherlikely to make housing less affordable in the coming years and the market beginning to show signs of cooling, prices are “probably” going to fall back as homeowners are increasingly cautious about how they spend their money.
“The most likely scenario is that higher interest rates will lead to a modest decline in prices in the coming year or two,” economist Ben Tal wrote in a report.
The bank used a model created by theand updated it with April sales data from the Canadian Real Estate Association to reach its conclusion. The price of an average house has gained 23 per cent since hitting lows in January, 2009, and prices are now 7 per cent higher than they were before the recession.
He said prices are 14 per cent above their fair value, “as justified by housing market fundamentals such as income, rent or demographic changes.”
That means 1.5-million homes are overvalued, he said. Of those homes, 760,000 are overvalued by more than 5 per cent.
Twenty per cent of homes in BC are considered overvalued, 17 per cent in Alberta, 13 per cent in Manitoba and Saskatchewan, 13 per cent in Quebec, 11 per cent in Ontario and 8.6 per cent in Altantic Canada.
“Despite these troubling valuation statistics, a closer look at recent developments in the housing market shows that stabilizing forces are already at play,” he said.
He said new listings are hitting the market at the fastest rate since the early 1990s, and unit sales are decreasing. This is moderating price increases, “with the three-month moving average growth decelerating rapidly over the past six months.”
And while interest rates are poised to move higher, making mortgages more expensive for households, it is unlikely the Bank of Canada will be able to increase rates quickly.
“An array of limiting factors including a strong dollar, the end of fiscal stimulus, a slower pace of economic activity in the U.S., and a more rate-sensitive household sector suggest that rates will only climb very slowly over the next two years,” he said.
A rapid crash in prices isn’t likely, he said, as the market slowly adjusts.
“The fact that prices are overvalued today does not necessarily mean that they will crash tomorrow,” he said.
“A violent market correction needs a trigger such as the sub-prime crisis which ignited the U.S. real estate meltdown, or abnormally high interest rates as was the case during the 1991 property crash in Canada. Fortunately, that is not on the horizon this time around.”
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