Canada's housing market may still be cooling, but there are fears in some quarters that "bubble fatigue" will pump it back up heading into the spring season.
What economist Benjamin Tal means when he uses that phrase is that home buyers are skeptical about whether the residential real estate market is heading for a sharp price and sales drop. At the same time, mortgage rates are declining, not rising.
Just this weekend, Bank of Montreal cut the price on its five-year, fixed-rate mortgage to 2.99 per cent from 3.09 per cent. That's the lowest advertised rate among Canada's big banks, and lower rates are available in the market.
The concern for observers like Mr. Tal is that the housing market needed to deflate, as it has since Finance Minister Jim Flaherty brought in new mortgage restrictions last summer in an attempt to engineer a soft landing. Should that reverse, it could lead to bigger problems down the road.
"I think the spring will surprise on the upside," the CIBC World Markets economist said on Monday.
"I don't think, from a macroeconomic perspective, that is a good thing, since we do need to see the market softening. Any delay in that process will add to a longer and maybe even deeper adjustment in the future," Mr. Tal said.
Indeed, "bubble fatigue" may well prove wrong the forecast for dismal sales this spring, he added.
"People have been talking about a collapse for two years, so many are becoming a bit skeptical about that," he said. "As well, rates are in fact going down, not up."
For now, the slump in sales continues, with the Greater Vancouver area reporting on Monday a 29-per-cent decline in February to 1,797 on the Multiple Listing Service from 2,545 a year earlier. It marked the second-lowest February level since 2001.
Sales in the Greater Toronto Area during the first 14 days of the month were down 8.3 per cent from a year ago. (Full monthly figures will be released Tuesday.)
And sales in Calgary, which was forecast to be an outlier this season with rising transactions, saw them dip 1.27 per cent year over year in February.
Several economists and policy makers still hope for an orderly slowdown amid lingering fears that prices remain too high.
The Fitch ratings agency said Monday that Canadian prices are overvalued by about 20 per cent. And while that estimate is somewhat higher than most, many economists believe it would be unhealthy for a market rebound this season. They hope prices will soften before any market rise in interest rates or drop in employment, either of which could spell trouble.
Because of inflation and the momentum in prices, Fitch does not forecast that prices will drop that far, and it expects a decline to be gradual.
"If growth halted and prices began to drop, it would be expected to take several years for home prices to revert to their sustainable values, depending on a number of factors such as government support and credit availability," the rating agency said. "With this time frame, the actual observed decline in prices could be as low as 10 per cent," with inflation offsetting some of the greater decrease.
There are signs that the sales slump that has persisted since the middle of last year is nearing an end.
Vancouver's February sales, while much lower than a year ago, were still up 33 per cent from January.
"With a two-point increase in our sales to active listings ratio and a reduction in the average number of days it's taking to sell a home, February showed some subtle indications of a changing sentiment in the marketplace compared to recent months," said Eugen Klein, president of the Real Estate Board of Greater Vancouver. New listings are also down in Toronto, lending support to prices in the country's most populous city.
Real estate economist Diana Petramala of Toronto-Dominion Bank noted that national sales have fallen by about 8 per cent since Mr. Flaherty tightened the mortgage insurance rules in July. "Our view is that the impact of mortgage insurance rules tends to be very temporary, and lasts for about two to three quarters," she said. "So we do think we'll see a bit of a bounce back in sales, particularly heading into the spring period."