Balanced market is forecast by TD Bank
A TD Economics Special Report released today calls for a 5% increase in home prices in Alberta for 2008, and no major correction. Hi-lites of the report:
The main conclusion is that sales will moderate, leading to a sales-to-new listing ratio that is consistent with balanced markets and cause more moderate price growth. However, we still don’t see a major housing correction for a number of reasons.
· First, the parallels with the U.S. experience are limited. Much of the U.S. housing excess came from an inappropriate loosening of credit conditions that did not occur in Canada. In 2007, 32% of mortgage origination was subprime loans (i.e. to high risk borrowers) compared to an estimated 5% in Canada. Loans with no documentation for income, jobs or assets became common in the United States, while such practice was rare in Canada. Interest-only mortgages became popular in the U.S., but in Canada were less than 5% of mortgage originations.
· Second, the similarities with the last Canadian housing bubble in 1989 are also limited. Affordability in 1989 deteriorated to 39% of personal income. Much of the new home building was done without the presales of today, and this led to a significant supply overhang in 1989 that is very unlikely to occur in the current market. The pace of home price appreciation, after removing inflation, was significantly greater in the past. And, the housing fundamentals today are far superior, with lower unemployment and interest rates – although income growth was comparable.
· Third, and this is critical, both the latest U.S. housing bubble and the Canadian bubble of 1989 were pricked when the central bank tightened monetary policy significantly, causing speculators to scramble for the doors. However, the debate at the moment in Canada is how low rates will go – not how high they will climb. The weakness in the U.S. economy is coming at a time when the high-flying Canadian dollar is keeping inflation at check. This gives the Bank scope to lower rates.