Forget all the housing crash talk says a new report that suggests prices acceleration in Canada’s housing market will slow down without any hard landing.

Moody’s Analytics, which used the Brookfield RPS house price index for its models, maintains that prices in Canada will slow down as some markets, especially Vancouver and Toronto, see homes become overvalued and less affordable while international capital inflows slow down.

“We are predicting that the housing market will slow down, in terms of house price growth, significantly,” said Andrew Carbacho-Burgos, an economist with Moody’s Analytics who suggests national house price growth will drop  to about two per cent by the end of 2018, from about eight per cent now. “We definitely expect a cooling off led by Vancouver and Toronto.”

It could be bad news for smaller cities, which the advisory firm says will actually experience house price declines, adding that commodities prices could drive prices lower in cities in Alberta and Saskatchewan and in St. John’s, N.L.

The Moody’s report comes out as the head of Canada Mortgage and Housing Corp. said in column published Monday that his organization will issue a red warning card for the state of the Canadian housing market when it releases its third quarter report later this month.

“Concerns about elevated prices in Vancouver and Toronto are well-known,” wrote Evan Siddall, the chief executive of CMHC. “Affordability pressures hurt lower-income households the most and cause real socio-economic consequences. CMHC has recently observed spillover effects from Vancouver and Toronto into nearby markets. Those factors will be reflected in our forthcoming House Market Assessment on Oct. 26. They will cause us to issue our first red warning for the Canadian housing market as a whole.”

Siddall’s comments were largely backed up by a leading credit agency report that wondered whether the home ownership dream in Vancouver and Toronto was all but dead for the average buyer. In a report out Monday, DBRS Inc. said that, based on the gross debt service ratio cap of 39 per cent set by Ottawa — the percentage of your income required to cover all housing costs — both cities appear to be way out of reach for most households.

“One consequence stemming from the sharp house appreciation is that more and more Canadian residents are finding it difficult to achieve their home ownership dream,” noted DBRS, adding that, based on theoretical calculations using average price, average income and average five-year mortgage rates, the GDSR is 82 per cent in Vancouver and 50 per cent in Toronto.

Both Siddall’s comments and the DBRS report come on the same day that new federal mortgage rules — which will make it harder for consumers to borrow money by forcing them to qualify based on a much higher rate than the one on their contract — went into effect .

Phil Soper, the chief executive of Royal LePage Real Estate Services, applauded the government for rules cracking down on the misuse of the principal residence tax exemption, but questioned whether the government might be going too far in other ways.

“The housing industry continues to do the heavy lifting for the Canadian economy. And in our largest cities, we have these tax burdens,” said Soper, pointing to a double land transfer tax in Toronto and 15 per cent additional property transfer tax on foreign buyers in Vancouver. “All of these changes, whether they be municipal, provincial or federal, are all additive, and we have to be very, very careful that we don’t put too much of a drag on this primary engine of economic growth.”

Another factor that could be a major driver in slowing home price growth would be rising mortgage rates. Moody’s Analytics is expecting to see rates rise over the next two years as U.S. and Canadian monetary policy revert to pre-Great Recession norms.

Moody’s Carbacho-Burgos said he just can’t see the hard landing, which he defines as a national price decline of at least 10 per cent. However, his report was generated before the latest changes to mortgage rules in Canada, which tighten credit access.

“What we would expect, based on rule changes, is an exacerbating or cooling trend nationally. In particular Toronto, which will have much slower growth and its neighbouring areas as a result of the rule changes,” said Carbacho-Burgos. “But we don’t see any reversion to a house price crash.”

 

Garry Marr

Financial Post