Friday, May 3, 2019

Odds of a Canadian housing crash are now the lowest in years

Anyone banking on a Canadian housing crash might be out of luck, as the odds of a collapse haven’t been this low in years.

So suggest two newly published reports, which arrived not long after The Big Short investor Steve Eisman — who became the stuff of legend for predicting the 2008 Financial Crisis — made his next big bet against the market.

In the Canada Mortgage and Housing Corporation’s latest Housing Market Assessment, the Crown corporation downgraded its risk evaluation for the national market.

According to CMHC, the market is now showing a “moderate” degree of vulnerability. That’s good news when compared to its February evaluation, which maintained risk was running “high.”

“After ten quarters, the state of the national housing market has improved to moderate vulnerability,” says Bob Dugan, CMHC’s chief economist, in a statement.

“Even though moderate evidence of overvaluation continues for Canada as a whole, there has been improved alignment overall between house prices and housing market fundamentals in 2018 in comparison to the previous year,” Dugan adds.

Canadian home prices are cooling, and that coupled with “low” evidence of overbuilding and overheating explains CMHC’s rosier outlook.

In a separate report also out this week, RBC notes how lower interest rates are reducing risks.

“A downward revision to our outlook for interest rates is reducing already-low odds of a steep and widespread housing downturn over the next 12 months in Canada,” reads RBC’s latest Canadian Housing Health Check.

Last year, the market consensus was that the Bank of Canada was going to continue on its path of gradually hiking its policy rate, which influences the mortgage market.

Between the summer of 2017 and October 2018, the central bank had, after all, hiked the policy rate a total of five times bringing it to 1.75 percent.

But the economy has since sputtered, and many expect the central bank to stand on the sidelines for the rest of the year — with a minority even calling for a rate cut.

That doesn’t mean the forecast is clear, though. According to RBC’s health check, affordability is in the red, meaning it’s “significantly outside historical norms and posing a much higher risk than usual.”

“The high cost of homeownership in Vancouver, Toronto and, increasingly, Montreal are a top vulnerability for Canada’s major markets,” RBC notes.

A more widespread issue is the overbuilding of multi-family homes, which include condos as well as rental units.

“Elevated levels of apartment construction in Vancouver, Toronto and Montreal raise some potential longer-term absorption issues,” reads the report.

Before bears like Eisman get too excited: “There’s little risk near term, however, as unsold inventories are low at the present time,” RBC adds.

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