U.S. investment bank Goldman Sachs says there’s an almost one in three chance of Canada’s housing market going bust in the near future.
The warning comes with a fairly large proviso, however, in that the bank’s view a housing “bust” is based on the equivalent of a house price decline of as little as five per cent. A larger correction is on the table but in Goldman’s eyes, even a relatively minor drop of five per cent would qualify.
In a recent report, the bank looked at the housing markets of what it calls G10 economies, those with the most heavily traded currencies in the world — a list that includes the loonie, the yen, the pound, the Swiss franc and many more.
The eurozone is included in the bank’s calculations as one entity, and because it is made up of such a wide variety of countries and economies, average scores for the eurozone show nothing alarming.
That’s not true of the rest of the list, however. After grading factors such as overbuilding, mortgage debt levels and prices, the bank figures that New Zealand’s property market has a 40 per cent chance of correction, followed by Sweden at 35 per cent. Canada places next, with what Goldman Sachs deems a 30 per cent chance of going bust.
“Prices do appear overvalued and credit growth has been high,” Goldman Sachs says of the housing market in Canada, “traditional warning signs of real house-price declines.”
As has been the case in many countries, Canada has been undergoing a housing boom since the recession of 2009, with average house prices up by more than 40 per cent in nominal terms since 2010.
That’s not as high as some other places, but prices aren’t the only problem. Goldman singles Canada out for having a higher than usual percentage of its GDP tied up in residential real estate, and also for its current pace of homebuilding, which is roughly twice as much right now as demographic demand would warrant.
Add it all up and “house prices indeed look quite high for several of the small open G10 markets” including Canada, Goldman says.
‘Home prices could justifiably fall’
The report authors at Goldman aren’t the only ones who think so.
Eric Lascelles, chief economist at RBC Global Asset Management, said in a recent report that he thinks the likeliest outcome for Canada’s housing market is a situation in which “gains slow to a snail’s pace or even go sideways.”
He says there’s a 40 per cent chance of that happening, slightly higher than the 30 per cent odds he ascribes to the boom continuing unimpeded.
“So long as interest rates remain low and the unemployment rate is declining, this boom could endure,” he says.
He says the likelihood of a correction, meanwhile, is about where Goldman Sachs deems it to be: 30 per cent.
“Home prices could justifiably fall fairly far,” he says. “This would unleash a period of…