Long convinced the country’s housing boom would never end in a crash, Canadians have watched this autumn as a sharp slowdown in real estate spreads across the country, leaving would-be home buyers hopeful and sellers scared.
"The power is in the hands of the buyer – that’s what I’m feeling," said Andria Petrillo, 32, as she and her husband toured a quiet open house in the heart of Toronto, where crowds and chaos once reigned over weekend home showings.
But like most people shopping for a new home, Petrillo has to sell her old one first. And that’s where she worries.
Signs are everywhere that Canada’s long run-up in house prices is over, hit by a combination of tighter mortgage lending rules and growing consumer reluctance to take on more debt. Sales of existing homes are down steeply, with condo sales hit especially hard, and some long-booming prices have started to fall.
Sales always slump as the real estate market heads into winter. The big question will be whether spring brings renewal, or confirmation that the party is over.
Canadian households hold more debt than American families did before the U.S. housing bubble burst, which has led the government to tighten mortgage lending rules four times in four years.
And data released on Wednesday showed the Canadian economy shrank in August, an unexpected downturn that bodes ill for housing even as the U.S. economy shows signs of recovering.
The debate in Canada is whether the market will come down with a thud or make a relatively soft landing, as most mainstream economists predict. They see a 10 to 15% correction in prices and a slowing in housing starts to 180,000 a year by 2014, down sharply from the 220,000 range today. In that scenario, GDP growth would be cut by one to 1.5 percentage points, according to CIBC World Markets.
The Bank of Canada has forecast economic growth of just 2.3% in 2013 and 2.4% in 2014.
Some experts believe slower sales activity will be followed by falling prices in many cities. But they also say Canadian lending standards have been higher, and borrowers more cautious, than in the United States before its crash, which will prevent large-scale mortgage defaults and plunging prices.
Mindful of what happened in the United States, the Canadian government has tightened mortgage rules to prevent home buyers from taking on too much debt. While interest rates are low and expected to stay low into 2013, the fear is that eventual rate hikes will drive borrowers out of their homes or into bankruptcy.
Canada’s big five banks, which sell and hold the bulk of the nation’s mortgages, are adjusting to the slowing mortgage market with a stress on other financial assets, such as credit cards and auto financing, to bolster their lending businesses as the profitable mortgage market shrinks.
The last round of mortgage rule changes took effect in July, forcing home buyers to cut back on their budget and pushing many prospective first-time buyers out of the market entirely.
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