Canada’s housing market is “relatively insulated” from a US-style crash and Canadians might simply need to get used to high home prices, according to the chief economist at Chartered Professional Accountants (CPA).

In his report The real story behind housing and household debt in Canada: Is a crisis really looming?, economist Francis Fong examined the risks and vulnerabilities of the Canadian housing market and whether the widespread rise in household debt combined with sky-high home prices meant that the often-predicted price crash was imminent.

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Fong compared the characteristics of the Canadian housing market with those that caused the US subprime crisis of 2008. He found that “Canada does not share the credit quality issues that plagued the US housing boom-bust cycle, such as the prevalence of subprime mortgages… Most critically, Canada’s housing market has not been driven by growth in low credit quality mortgages, despite the impression given by rapid price gains… In contrast, [Canadian] credit quality has actually improved alongside the growth in home prices.”

Fong cited Equifax data that found the proportion of homebuyers with “very good” or “excellent” credit scored increased from 81.5 per cent in 2013 to 84 per cent in 2017. Among first-time homebuyers, the improvement was even more marked, rising between 2013 and 2017 from 79.4 per cent to 82.4 per cent. Fong said, “This suggests that home price gains are being driven by those who can actually afford such prices.” Fong also pointed out that 82 per cent of Canadian mortgages are uninsured, which means that the buyer had at least a 20 per cent down payment.

He added, “The risk is further lessened by a much higher concentration of mortgage activity in Canada among fewer financial institutions and the way those institutions use securitized mortgages.”

Some threats to housing market still looming

However, Fong stressed that there were still some risks to the Canadian housing market. He wrote, “A growing share of the mortgage market is made up of less-regulated financial institutions beyond the big banks. In addition, recent data show that nearly a quarter of new borrowers hold debt exceeding 450 per cent of their income – a level far beyond the 170 per cent debt-to-income ratio at the national level that is normally quoted – making them significantly more vulnerable to the current rising interest rate environment.”

He added that major urban centres such as Metro Vancouver and Greater Toronto, which have seen some “downward pressure” on home prices recently due to slow sales and rising inventory, could still see further price drops.

“Whether there will be further downward pressure on prices remains an open question. The fact that home sales are so low while home prices appear to have stabilized could speak to a fundamental imbalance between supply and demand in Canada’s major cities, or to the possibility that more downward pressure is yet to come.”

Fong concluded, “However, the overall risk presented by housing does appear to be relatively well-contained, begging the question that, if these levels of home prices are not being driven by unsustainable growth in bad credit to over-indebted households, then what factors are driving home prices up so high? A possible answer, though unpalatable, is that… home prices are [economically] justified. This is perhaps the most terrifying threat of all: not an imminent economic crisis, but the possibility that homes may never be affordable for those who are already priced out; that, on their way to becoming world class, our major cities stopped being the bastions of equal opportunity we like to think they are. This may simply be what Canada is now.”

Consensus forecast: slowdown or dip, then recovery

The CPA economist’s big-picture predictions are largely supported by most current industry forecasts, which are generally expecting B.C. and Metro Vancouver home prices to see a price growth slowdown or even a slight dip over the next couple of years, followed by a recovery.

The B.C. Real Estate Association is not expecting average B.C. home prices to fall, although its price growth forecast for 2018 is a mere 1.2 per cent. However, it expects a much stronger 5.8 per cent annual rise in average home prices in 2019.

Local real estate analyst Dane Eitel is less optimistic about the Metro Vancouver housing market's short-term forecast, although bullish on the long-term picture. Using stock-market-style analytics, Eitel predicted that both detached homes and condos in the region would drop significantly in price and stay muted for around three years, but would then recover starting around 2022, and eventually achieve new record price levels.

The Canada Housing and Mortgage Corporation is forecasting the average Metro Vancouver MLS home sale price to be between $940K and $980K in 2018 (up slightly from 2017’s $934,977). The average home price is then expected to drop in 2019 to between $847K and $939K, and then slip to somewhere between $800,000 and $918,000 in 2020.

The CMHC said that a major factor in falling prices is rising interest rates making mortgage payments less affordable. It said, “Rising mortgage rates since May 2017 and stricter borrowing requirements are also having an impact on potential home buyers through two channels; 1) rising rates increase the carrying cost of holding a mortgage and; 2) rising rates have an impact on borrowing capacity.” This could mean falling home prices don’t necessarily equate to better housing affordability for buyers.