House price correction to ‘start this year,’ big-name investor warns

Another big-name foreign investor says Canadian home prices are ripe for a pullback. Another big-name foreign investor says Canadian home prices are ripe for a pullback.
Another big-name foreign investor says Canadian home prices are ripe for a pullback. Another big-name foreign investor says Canadian home prices are ripe for a pullback. Getty Images

Yet another big-name foreign observer is warning that Canada’s long-booming housing market is due for a potentially nasty correction – and it expects the slide to start this year.

Pimco, one of the biggest institutional investors in the world, said it believes housing prices could decline as much as 30 per cent over the next several years.

Ed Devlin, the man in charge of the U.S.-based fund’s Canadian investments, said in a newspaper article that Pimco has grown increasingly “bearish” on the Canadian housing market over the last several quarters.

READ MORE: Home prices stretched by 10%, bank report says 

Data from Morningstar shows that since late 2012 Pimco has cut in half the amount of money it holds in investments in Canada, one of the fund’s top country picks until late.

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“I’ve been talking with clients and writing about how the housing market is overvalued,” Devlin told the Financial Times (paywall).

“I actually think it starts this year,” the Pimco executive said of the potential slowdown.

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Two to five years

Devlin said he expects borrowing rates to rise off their historic lows in the coming months and mortgage loan growth to slow, developments that will bring the country’s years-long housing boom to an end.

A market correction won’t be totally sudden, however, with Pimco suggesting it it expects events to play out over a two- to five-year time frame.

“While we think the housing market in Canada is overvalued and due for a correction, the correction will likely happen over several years,” Devlin said.

Ottawa efforts to cool market

Ottawa has moved repeatedly to cool the market place in recent years. It has taken steps to reign in how much mortgage debt the Canada Mortgage and Housing Corp. backstops while cutting back the length of home loan terms to 25 years, forcing borrowers to save bigger down-payments.

But with the exception of a lull in late 2012 and early 2013, the pace of activity has remained brisk, fueled by ultra low interest rates as well as the government’s own national housing insurer, which has backstopped hundreds of billions of dollars in mortgages.

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READ MORE: CMHC moves to raise mortgage insurance premiums

The rise has sharpest in the country’s biggest and most expensive cities, notably Vancouver and Toronto, where average prices now sit at levels several times average household incomes.

READ MORE: January price gains strain affordability in big city housing markets 

Calmer opinions on home front

Pimco joins other foreign observers in calling a potentially sharp downturn, a group that includes Germany’s Deutsche Bank which says the country’s housing market is the most overvalued in the world.

Within Canada, calmer opinions prevail.

TD Bank for example, said it too thinks the market is overvalued but but by a much more modest 10 per cent. The bank said rates will slowly drift higher but that the rise should be manageable for consumers.

The Bank of Canada, meanwhile, continues to see home prices gliding into a soft landing.

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