Views clash on health of housing market

Toronto condominium sales were down 55 per cent in the first three months of the year. "Demand is expected to level off this year amid good affordability and a strong rental market," a new report from BMO says. Kevin Van Paassen/Canadian Press

It’s a confusing time for would-be home-buyers and sellers alike.

For the past several months, a barrage of surveys and reports have bombarded both groups alternately reassuring them the market while cooling is doing fine or warning of an impending and painful correction to come.

The see-saw of opinion is showing no signs of slowing down. Compare two back to back observations made in recent days:

“As we navigate through the upcoming spring and summer markets, we expect to witness some renewed stability in sales and homebuilding activity – a trend that is likely to carry over in 2014,” a new report Monday from TD Economics said.

The comment followed this from Capital Economics last Friday: “Housing starts data show that Canada’s slowdown is similar to the early stages of the US housing slump.”

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Who’s right? And perhaps as important, are rosier housing outlooks being produced by bank forecasters because of their proximity to affiliated businesses holding billions of dollars worth of mortgages?

The big banks, who double as the country’s primary mortgage lenders, generally paint the same narrative: low interest rates – low before the recession and lower since – have spurred a decade-long housing boom.

Tighter lending rules recently implemented by a concerned federal government, coupled with persistently sluggish economic growth are now cooling the market, moderating demand and bringing supply into line with “normalized” growth in the number of new families or households looking to buy a home.

A period of slower growth but stable market conditions awaits, the story goes.

“After a decade of robust price and construction growth, major housing markets from coast to coast to coast appear to be landing softly,” TD said in its latest market update.

Yet Capital Economics – an independent researcher – maintains the years-long low-rate environment has driven up unsustainable prices, most pronounced in Vancouver, Toronto, Montreal and Ottawa.

There’s also glut of unsold inventory of some housing types, notably condominiums in cities like Toronto (where it’s estimated half of all units built in recent years have been bought by investors, according to Bank of Montreal). A long slide looms, Capital Economics warns.

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“Despite these excesses, the consensus still insists that Canada is different and that its housing market will perform a soft landing without too much stress on the economy. It’s a heart-warming view but unfortunately the facts get in the way,” Dave Madani, an economist at the researcher, said.

A May 22 report from the Canadian Association of Accredited Mortgage Professionals takes a similarly dour view.

The independent industry association said it expects starts to decline sharply over the next couple of years, eliminating many jobs directly and indirectly involved in the housing sector along the way.

Yet the outlook also differs from market to market. An updated report from BMO last week suggested that it expects prices to dip further in Vancouver while Toronto will begin to experience “moderate declines” in prices this year.

In Alberta and Saskatchewan, on the other hand, the bank expects resales and pricing to remain healthy.

Laurence Booth, a finance professor at Rotman School of Management at the University of Toronto, says faith is well placed in the views published by the economics departments of the country’s major banks. There’s a strict separation between research and sales units (so-called Chinese walls compartmentalize each division) he said.

“What’s the point of the forecast if there’s a huge conflict of interest and the judgment is affected,” Booth said.

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He suggested opinions are also formed as economists compare their data with one another. “People get together and they talk and come to similar sorts of assessment.”

A spokesperson for TD said, “TD Economics operates independently within the bank to provide analysis and insight of economic performance.

“In addition the department acts as a ‘think tank in a bank’ by regularly identifying and examining public policy issues that impact the standard of living and quality of life of our customers and the communities in which the bank operates.”

The banks’ soft landing scenario received some concrete evidence Tuesday in the form of Vancouver’s resale figures, which in contrast to the sharp declines witnessed in previous months, ticked one per cent higher in May.

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