National Bank’s chief rates and public sector strategist Warren Lovely published a timely research report entitled Canadian housing springs a leak on Wednesday. The report leaves a lot to reader interpretation, with only a brief description followed by more than 20 charts.
After studying the charts, my main takeaway is that housing prices are set for a decline of about 12 per cent on average over the next 20 or so months.
National Bank predicts that insured variable and fixed mortgage rates will climb above the 2019 highs of near 3.75 per cent and 4.25 per cent, respectively, with both reaching 4.5 per cent later this year. The mortgage rate increases so far, caused in part by faster Bank of Canada monetary tightening than previous cycles, have led to a pullback of roughly 5 per cent from the highs for resale homes.
The most important chart in the report is chart 18: How much weakness (and for how long) last time? (I posted a copy on social media here ). It shows that during the last Bank of Canada tightening cycle in late 2017 and early 2018, the price of the average resale home dropped 10 per cent until the bottom was reached 21 months rates starting rising.
There are reasons to expect the correction to be larger this time. The current cycle has been frothier, with housing prices climbing 10.4 per cent in comparison to 3.8 per cent and 3.0 per cent for the previous two cycles.
Mr. Lovely also emphasized that variable rate mortgages have climbed to record levels as a percentage of total originations, at roughly 55 per cent. This raises the probability of forced sales and downward pressure on housing prices as mortgage payments bite household finances.
There are also factors that should mitigate the damage in housing markets. The country’s enviable increase in population growth between 2016 and 2021 will continue to support housing demand, as will the steady climb in immigration.
The domestic housing market has always been a catalyst for strong emotions. There have been many pundits warning of a real estate collapse and almost as many arguing that the housing market will rise over any reasonable future time period – if not forever. Despite this drama, the future for housing markets might be a bit boring: a painful but shallow correction followed by price stability and milder gains.
For equity markets, there may be a silver lining as the froth and frenzy departs the real estate markets. Interest may return to stocks as housing looks less bulletproof as an investment option.
— Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
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source National Bank predicts drop in housing prices but there’s a silver lining for equity investors. Plus, money pros slash TSX targets