CIBC: House Prices in Canada Are Over-Shooting, But No Crash

Another research note out today, this one by CIBC, states that “relative to rent, income and demographics, house prices in Canada are over-shooting.”  CIBC explains that it doesn`t necessarily mean that a crash is in the works, however a 10% price drop is probable.

A violent market correction needs a trigger such as the sub-prime crisis, which ignited the US real estate meltdown, or abnormally high interest rates as was the case during the 1991 property crash in Canada. That is not on the horizon this time around. The Bank of Canada is very clear about its intention to move slowly, with the first rate hike not expected before late 2012. As well, any objective assessment of the quality of the existing mortgage portfolio in Canada reveals a relatively balanced mortgage market with a small segment of marginal borrowers.

Accordingly, while we do not see house prices crashing, we do believe that the housing market in Canada will stagnate in the coming year or two. Further out, the most likely scenario is that the eventual increase in interest rates will lead to a modest decline in prices (probably in the magnitude of 10%). But given relatively modest rate hikes and the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years — paving the way for a healthier housing market later in the decade.

Indeed a flattening in house prices in the next year or so is a necessary condition for such a soft lending scenario. If the pace of house price increases accelerates during that period, then twelve months from now the likelihood of a violent price correction will be higher than it is now.

You can read the entire research note here

One response to “CIBC: House Prices in Canada Are Over-Shooting, But No Crash

  1. Slow Melt

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