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Business Briefing Canada’s housing market correction ‘is not over yet’

Briefing highlights

  • Housing correction not over: CIBC
  • A Fed scene I’d love to see
  • Markets mixed at a glance
  • Canada’s inflation rate slows
  • What to expect from the Fed today
  • RBC hits back at Facebook report
  • U.S., China clash at WTO
  • Glaxo in joint venture with Pfizer
  • Buffett cuts Home Capital stake

Not over yet

The Toronto and Vancouver housing markets aren’t out of the woods just yet, economists warn.

For that matter, the residential real estate correction playing out across Canada isn’t done yet, either, CIBC World Markets said in a new study, though those two cities are the ones in the spotlight.

“The adjustment in the Canadian housing market in general, and in Vancouver and Toronto, in particular, is not over yet, with the Toronto condo market likely to soften in the coming year,” CIBC’s Benjamin Tal and Royce Mendes said in their report.

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“But we believe that market forces suggest prices will find equilibrium next year even if slowing activity continues to weigh on GDP.”

Given their comments on Toronto condos, it’s interesting to note, too, that Bank of Montreal is citing pressure on Vancouver’s condominium market.

This all comes in the wake of provincial tax measures in B.C. and Ontario aimed at cooling down Vancouver and Toronto, and new cross-Canada mortgage-qualification rules meant to stop a credit bubble.

Added to that are higher interest rates.

Canadian home prices had, of course, been on a tear, and consumer debt had swollen, until policy makers acted so forcefully.

Mr. Tal, CIBC’s deputy chief economist, and Mr. Mendes, senior economist, said in their study this week that “Toronto’s not out of the woods yet.” Nor is Vancouver, Mr. Mendes added in an interview.

“While Toronto is faring better than Vancouver, not all is well in the GTA, either,” Mr. Tal and Mr. Mendex said.

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“In fact, the Toronto market is a tale of many markets,” they added.

“So far, the low-rise segment has been the real casualty of rule changes and higher interest rates, but even within that market there has been a significant divergence between pre-sale (new) and existing homes.”

They expect the market for new homes will now “continue to soften,” too, as developers hold back.

The Bank of Canada, which has been raising interest rates, has said housing markets are stabilizing, but Mr. Tal and Mr. Mendes don’t see that.

“The central bank’s own workhorse model says it takes six quarters before the full impact of any rate hike is felt in the economy,” they said.

“So it’s concerning for the outlook, then, that only five quarters since the first move of this cycle, let alone subsequent rate increases, we’re already seeing a slowdown in housing-related indicators.”

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Vancouver’s condo market, BMO senior economist Sal Guatieri said separately, has sprung “a leak.”

“In response to higher borrowing costs, tougher mortgage rules and tax changes, Vancouver’s housing market has been under intense pressure this year,” Mr. Guatieri said, noting that prices for detached homes dropped almost 6.5 per cent in November from a year earlier.

“More recently, the less-unaffordable condo market has rolled over, with prices down 5.8 per cent since June,” he added.

“That’s a partial payback for the 74-per-cent moon-shot in the previously three years, partly launched by an easy monetary policy at the time.”

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A Fed scene I’d love to see

Hey, who’s that in the back heckling me not to raise interest rates?

Mark Wilson/Getty Images

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Markets at a glance

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Inflation slows

Savings at the gas pump are helping to drive down inflation.

Canada’s annual inflation rate cooled to 1.7 per cent in November, down significantly from November’s 2.4 per cent, Statistics Canada said today.

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The latest reading is the slowest in almost a year, and is largely because of a drop in gas prices. If you strip those out, consumer prices rose 1.9 per cent.

Seasonally adjusted, prices actually declined 0.2 per cent on a month-over-month basis.

“Bad news for Alberta has been good news for Canadian consumers, as cheaper gasoline has brought inflation down to earth,” said CIBC chief economist Avery Shenfeld.

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What to watch for today

The Federal Reserve is widely expected to raise its benchmark rate by one-quarter of a percentage point this afternoon, continuing its string of increases with a hike just in time for those late holiday shoppers.

The U.S. central bank will also unveil fresh projections, with a news conference with Fed chair Jerome Powell.

"We expect the Fed to hike rates despite the recent volatility in financial markets," said Nikhil Sanghani of Capital Economics.

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“But the renewed weakness of core inflation may prompt officials to revise down their interest rate projections.”

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