House prices still falling, CIBC says

Oct. 3, 2008 | Market Update | By Aaron Rossetti

 The Canadian housing market is close to becoming a buyer's market for the first time in more than a decade, but it won't be a bust, according to a report by CIBC World Markets.

Its projection that house prices will likely fall another five to seven per cent was issued as the real-estate industry was also reporting the number of homes being put up for sale retreated in August from the record levels of the previous four months.

"With new listings down from the recent peak, the resale housing market is stabilizing in most provinces," the Canadian Real Estate Association said in its latest monthly market report, showing new listings falling 5.4 per cent in August. However, it also reported that sales fell 3.8 per cent during the month as well, with declines in all provinces other than Alberta, and in nearly all local markets and that the average selling price was down 4.6 per cent from a year earlier.

The steepest declines in sales activity were in some of Canada's priciest real estate markets, including Vancouver, Victoria, Calgary and Toronto, which in turn pulled down the average selling price, it said.

"Slower activity in some of Canada's pricier housing markets compared to year-ago levels will continue weighing on the national average price," said the association's chief economist Gregory Klump.

"As our analysis shows, the Canadian housing market is stable and home sellers are not under pressure to sell," Klump said. "This is in stark contrast to the

U. S. housing market, where there are a large number of distress sales."

CIBC World Markets economist Benjamin Tal agrees.

The Canadian real estate market did become overvalued, Tal said. However, over the past six months it has gone from being a hot seller's market to a more balanced market, he added, projecting that over the next few months it will correct further into a buyer's market, something not seen in Canada since 1995.

"A mere five to seven per cent drop in prices from current levels should bring the national average back to equilibrium," he said. "That's a mere fraction of the 25 per cent overshooting seen in the U.S. by mid-2006."

The triggers that led to the free fall in U.S. home prices, or Canada's last housing market bust in the early 1990s, do not exist in Canada today, Tal said, rejecting a recent warning by another investment firm of a U.S. style meltdown here and an earlier projection that home prices in some major Canadian cities would have to fall by 25 per cent to bring them back into balance.

The collapse in the Canadian housing market in the early 1990s resulted from a sharp increase in interest rates by the Bank of Canada, which reduced housing affordability, Tal said, adding it would take a doubling of today's mortgage rates to match the drop in affordability that occurred then.

The current housing market recession in the U.S. was triggered by a variety of factors, key ones being a much heavier household debt burden and a much larger proportion of subprime mortgages there, he said.

"Eradicate subprime from the U.S. housing market and, instead of the most severe house price meltdown since the Great Depression, you get a trivial moderate cyclical slowing -- something along the line of what we are experiencing here," Tal said.