Housing bust unlikely, says think-tank
August 31, 2010
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Tony Wong
BUSINESS REPORTER
A U.S.-style housing crash is unlikely in Canada, says a study by the C.D. Howe Institute.
A decline in underwriting standards played an essential role in the American housing boom and subsequent bust. That has not been the case in Canada, says the study released Tuesday.
Canadian housing policies, which avoided the sharp declines in underwriting standards seen in the U.S. “worked well in reducing the possibility of a housing bust in Canada,” said the report.
The C.D. Howe report comes on the heels of one from the Canadian Centre for Policy Alternatives, which said the Canadian housing market is a bubble ready to burst. It also shows the debate that economists are having over the direction of the market.
Virtually all major economists have already said that a U.S.-style meltdown will not happen in Canada. And the Canadian Centre for Policy Alternatives report also says a U.S.-style housing bust is the most extreme scenario, and the unlikeliest to happen.
However, they agree that some kind of correction is overdue. The TD Bank has estimated that average prices are 10 to 15 per cent too high while CIBC has said 14 per cent. The Canadian Centre for Policy Alternatives says it could be anywhere from 9 to 21 per cent.
“Many of the concerns about the Canadian housing market are motivated by recent U.S. experiences,” says economist Jim MacGee, author of the report and an associate professor of economics at the University of Western Ontario.
“A comparison of housing market policies in Canada verses the U.S. suggests that there is a little likelihood of a U.S.-style surge in foreclosures or a collapse of house prices in Canada.”
From 2000 to 2006 U.S. house prices climbed twice as much as in Canada. Prices then declined by 30 per cent over the next three years from 2006 to 2009, according to C.D. Howe.
The decline in Canadian house prices lagged the U.S. and was more muted, as prices continued to appreciate until 2008, then declined by 9 per cent between August 2008 and April 2009. The decline was followed by a sharp bounce upward, with house prices returning to their pre-recession high.
“After another surge of pricing this year, buyers and sellers remain on tenterhooks about the future path of prices,” says MacGee.
The key to Canada’s relative strength to the U.S. is that federal government policy meant that banks north of the border did not engage in the same volume of risky loans. Low documentation, interest only and adjustable rate mortgages were driving sales in many markets.
“During the U.S. housing boom, both private insurers and government sponsored enterprises facilitated looser underwriting standards” said the report.
“It will be in the interest of all Canadians if policy makers recall the lessons of the 2008 to 2009 experience should pressures to relax underwriting standards reoccur in the future.”