RBC Economics says that Canada is experiencing a “Canadian-style” housing downturn but will avoid a US style housing market crash. The author of their recent Housing Trends and Affordability report, Senior Economist Robert Hogue, is advising Toronto residents not to panic about their real estate market.
I called Robert Hogue to get some of his thoughts on our real estate market.
John Pasalis: Some economists are saying that we’re lagging the US by 2 years and are heading for a US style collapse. What do you think are the key difference between the US and Canadian markets?
Robert Hogue, RBC Economics: Well, first of all you have the subprime catalyst in the US that is not really present in Canada. We have some subprime market here but it’s really a marginal phenomenon so any kind of collapse in that segment of the market won’t have a dire impact on the overall market … when you look at the financial condition of households in Canada the household debt has increased over the past two years but it still is not in the same zone as it is in the US so Canadian households are less say financially overstretched in terms of debt as is the case in the US. And also when you look at the banking industry, the financial sector in Canada is comparatively much stronger than in the US. Banks in Canada are still lending, a bit more picky these days but still lending, as oppose to an outright retrenchment in many parts of the US. So I think these conditions put some kind of a floor on how far the housing market can correct in Canada and certainly I’m not expecting a US style meltdown.
John Pasalis: What do you think caused the recent crash in Toronto’s sales over the past two months and do you think we’ll see this continue in the New Year?
Robert Hogue, RBC Economics: Well, Toronto more specifically I think is the case of the jitters that the economy is certainly souring in Ontario and I think it was an abrupt realization that the provincial economy is not immune to the storm in the global financial markets and the US economy as well. So I think it all kind of suddenly appeared to the market that the economic underpinnings are loosening up quite a bit and going forward demand is going to be affected and household confidence is eroding. So all this I think together painted a bleaker picture and it all kind of crystallized in a matter of just a few months. Now I don’t want to take it too far either, I think it might have been a little overdone in terms of the correction or it might have been all kind of front ended, the market turned on a dime fairly radically but it kind of brought forward all the corrections that we had kind of envisioned to take place gradually over time. Going forward things might not deteriorate much more but we’ll see.
John Pasalis: You mentioned in your report that you’re forecasting a phase of consolidation for Toronto’s real estate market. What does this mean to consumers? Reduced sales, reduced prices?
Robert Hogue, RBC Economics: Yes. I think that it is a situation where demand has already cooled considerably and I think what you’re going to see is prices continue to trend lower but I don’t think they’re going to crash. When you compare the situation now relative to ... where we were back in the late 80’s at the end of the last housing boom, the Toronto area had built up quite a bit of an imbalance back then, I think it was an overbuilt overpriced market and the correction was quite severe in the period that followed. Right now I don’t think that the imbalances are as severe as they were back then … focusing more specifically on affordability in the Toronto area is above, at least our measure of it is above the long term average, meaning it’s less affordable than the average but it’s nowhere close to where it was back in the 80’s. To me it argues for some kind of correction but certainly not of the same extent that we saw in the early 90’s.
December 9, 2008Market |