Canada Mortgage and Housing Corp. revised its forecasts on Tuesday, saying Canadians should watch for the housing market to "moderate" as both home sales and new construction start to slow.
But while many industry watchers agree that a softening is on the way, they are divided about how supple the housing market will get, and how serious the consequences might be.
Finance Minister Jim Flaherty, for one, believes the market's coming slowdown is a good thing. He said in an interview Tuesday that sources in the financial industry, as well as developers, have told him that "the situation was evolving where expectations by purchasers were excessive with respect to single family dwellings, and ultimately unaffordable when mortgage rates go up."
CMHC's third-quarter national market review predicts that after "sustained activity levels," growth will become measured. The Ottawa-based Crown corporation expects this cooling trend to extend through this year and into next.
"I'd rather see some softening in the markets, particularly in Toronto and Vancouver, than have a rapid decline," Mr. Flaherty said.
Craig Alexander, chief economist at Toronto-Dominion Bank, agrees that Canada is heading toward a modest correction but said: "I think the debate is over what the definition of 'modest' is." He noted that while his own calculations might indicate a slightly more significant downturn than those of CMHC.
"We need to keep in mind that a 10- to 15-per-cent drop in sales and prices over the next three years sounds quite dramatic, but when you think about the real estate market ... there have been years where we've had have 10-per-cent sales growth and 10-per-cent price gains," Mr. Alexander said in an interview.
This is not an economic threat, he added, but "a natural outcome of the strength we've had in real estate in Canada for more than a decade."
But Ben Rabidoux, an analyst with M Hanson Advisors, sketches a more troubling image. "I don't think the economists at CMHC are appreciating just how significant the effects of rising house prices have been on the Canadian economy and the labour market," he said.
He said there are several distressing trends that could cause significant problems. First, there is the high portion of the labour market employed in residential construction, and the significant contribution of construction and renovations to gross domestic product.
As well, he argues that when people feel their house is of a high value, they feel wealthier, save less for retirement and tap their home equity more often. When they change their behaviour, it can cause a serious drag on the labour market and the economy.
"I'm not saying it's impossible we'll see a soft landing," Mr. Rabidoux said. "But rising house prices and high demand for new homes have an impact on the job market, and it's difficult to see how we can move back to long-term trends without it meaning, frankly, a recession."
The rising unemployment seen in Canada's July jobs report was a reflection of weak consumer spending, he said.
Mr. Alexander does not agree that the national real estate market is crumbling. Hot markets such as Vancouver and the Greater Toronto Area might have to come down a few degrees (Vancouver's July sales were down significantly), but it would take a shock such as a dramatic rise in interest rates, or unemployment, to cause a significant downturn, he said.
"The Federal Reserve in the U.S. has told us they're not planning on changing interest rates until the end of 2014. And if the Fed is on hold, the Bank of Canada can't raise interest rates too much," Mr. Alexander said. "Unless the global economy goes back into a recession, there doesn't appear to be a catalyst on the horizon to cause a severe increase in unemployment."