The house price correction that some market analysts have been predicting for Canada for years will begin this year, says the world’s largest bond fund.
House prices in Canada will fall as much as 30 per cent over the next two to five years, says Ed Devlin, head of Canadian portfolio management for Pimco, the trillion-dollar mutual fund run by high-profile billionaire Bill Gross.
“I’ve been talking with clients and writing about how the housing market is overvalued,” Devlin told the Financial Times. “The change this year would be that I actually think it starts this year.”
But Devlin isn’t calling this a crash; he refers to it as a market “correction.” In a note published in January, Devlin said Canada’s housing markets won’t “burst” in a “disorderly manner” like the U.S. market, because Canada’s economic conditions are relatively stable.
Nonetheless, Canadian house prices are “stretched,” Devlin noted, and a cyclical correction back to more sustainable price levels is in the cards.
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Canada's Most Expensive Houses - February 2014
Not everyone agrees with this forecast, and whether or not Canada is experiencing a housing bubble has been the subject of heated debate among economists for several years.
But with prices hitting record highs and showing double-digit gains in some markets in recent months, more and more observers are growing worried that housing costs are growing unjustifiably high.
In a recent Reuters poll, 13 of 16 housing market analysts said they were “very concerned,” “concerned” or “somewhat concerned” that house prices could fall in Canada.
A recent Deutsche Bank survey named Canada as having the world’s most overvalued housing market.
But other observers argue Canadians can handle the high house prices, thanks to record-low interest rates that are making monthly payments more affordable than sticker prices would suggest.
Pimco’s Devlin doesn’t see those interest rates going up, but he does predict banks’ costs will rise, thanks to new regulations, and banks will pass on those costs to consumers.
One of those new rules was announced last week, when Canada Mortgage and Housing Corp., the government-run mortgage insurer, announced it is raising the premiums it charges for insuring mortgages by 15 per cent on average. Those new premiums will be reflected in higher borrowing costs for consumers who borrow more than 80 per cent of the value of their house.
A divide has opened up between domestic observers of the Canadian housing market -- who tend to favour the view that Canada’s housing market remains healthy -- and foreign observers, who appear much more concerned that Canada’s decade-long run of house price increase could end in disaster.
Bets against Canadian banks and the loonie have been hitting record highs over the past year. Those who bet against Canada’s banks have so far been losing, as their earnings have held up.
But those who bet against the loonie have been more successful; the currency has lost about 10 per cent of its value against the U.S. dollar over the past year, with about half that decline taking place since the start of the year.