Canadian home prices could fall up to 40%, warns Capital Economics

Residential property prices in Canada could fall by as much as 40% over the next five years, led by falls in Vancouver and Toronto where the markets have boomed over the past couple of years, it has been predicted.

A severe downturn would not just hit Canadian economic growth, but would also wipe out home price increases seen across many parts of the country in recent years.

If property prices do nosedive, thousands of recent property buyers with high loan-to-value mortgages could be plunged deep into negative equity.

The warning carries extra weight because it comes from a respected expert in the field in the form of David Madani, a senior Canadian economist at Capital Economics.

“I see a correction of between 20 to 40 per cent in the Canadian housing market – over five years,” Madani told BNN in an interview this week.

Madani says that the existing hot housing markets in Vancouver and Toronto are in a speculation-fuelled bubble that appears to be on the verge of popping, which will spark the start of a major correction.

“In a speculative housing bubble, once prices stop going up the whole reason for speculating in the market disappears,” Madani said.

Vancouver property sales in May dropped by 8.5% from a record peak a year earlier, but surged 22.8% from April and were 23.7% above the 10-year sales average for the month, according to data from the Greater Vancouver Real Estate Board. But Madani points out that the rise was largely driven by low mortgage rates, which is unsustainable.

 “The uptick in Vancouver home sales is nothing more than a head fake, while the worsening sales slump in Toronto’s much larger housing market points to a correction in prices,” said Madani in a report.

Sales of homes in Toronto dropped 20.3% in May from a year ago, while the average home price in the region depreciated by around 6% from April, according to the Toronto Real Estate Board.

“Considering that Toronto accounts for 20 per cent of the national housing market, this slump in sales will hit national second-quarter GDP, subtracting as much as 0.5 percentage points,” said Madani.

A slowdown in the housing sector could create a drag on consumer spending as consumers cut back on household consumption, according to Madani.

“Housing investment will be a drag on second-quarter GDP growth,” he added. “We estimate that growth could be as weak as 1.0 per cent annualised. But even if growth turns out somewhat better than this, the economic outlook for this year and next appears to be worsening.”