Canadian Dollars by Carissa Rogers

The Canadian housing market is likely to slow down. Home prices will probably drop by 5 per cent in the first half of 2012 as a result of a weakening economy, said economists at Bank of America Merril Lynch. Moreover, if the unemployment rate rises above 8 per cent, prices could decrease even more.

Economists Ryan Bohren and Sheryl King warn that the housing sector is oversupplied and about 10 per cent overvalued primarily due to record-low mortgage rates and longer amortization periods. “In our view, the housing market is one of the most vulnerable sectors to this weakening economic environment, showing classic signs of overvaluation, speculation and oversupply,” they said in the report.

The alarming border could be an 8 per cent unemployment rate. If it crosses the border, “outright recession” and a drop in commodity demand are probable. It would likely lead to a rise in mortgage delinquencies and forced selling, resulting in a decline in home prices by around 10 per cent. The authors expect this scenario with 40 per cent probability. Another scenario with 50 per cent probability predicts a 5 per cent drop in prices as well, but rebounding within the second half of the year. They also are concerned about the condominium market, which is probably in the late stages of an inventory cycle.

“People who believe we do not have the potential for a significant correction are just not paying attention. It’s getting more dangerous by the week,” Garth Turner Turner told CRE Online in July this year.

Lawrance Solomon in his commentary for Financial Post advises Prime Minister Stephen Harper and the provincial premiers to set the distorted Canadian housing sector aright and not to let Bank of Canada raise interest rates, as it could become the last hope in avoiding the housing bubble crash.

“The remedy for Harper is straightforward: Rather than ignore the distortions in Canada’s housing sector and cause Carney to raise interest rates, Harper should systematically peel back the layer upon layer of subsidy that levers our giant housing market into a teetering threat,” he says. The deregulation of the housing market is the solution that he suggests, and he adds that otherwise, the entire economy and homeowners in particular will be put at risk.

Unfortunately, the deregulation is not a question of a month. Even if he is right, the second wave of the crisis will probably hit the Canadian economy sooner. A Postmedia News report has already set the most probable scenario: weak global economic growth, rising unemployment, a slowing Canadian housing market, and low consumer spending will probably force the Bank of Canada to decrease its rates again.