Housing correction? Maybe – but not a major decline

It is no secret that Bank of Canada governor Mark Carney is concerned about a potential decline in home prices. However, cycles of declining home prices are far from unusual in Canada. In fact, there have been three during the past two decades, ranging from -6% to -12% at the national level, according to Stéfane Marion, chief economist and strategist at National Bank Financial.

He points out that declines traditionally occur after a meaningful increase in interest rates pushes the buy-to-rent ratio to roughly 2.2. The ratio is again closing in on that level.

“The higher leverage of Canadian households caused by the near doubling of home prices over the past decade makes them more vulnerable to a rise in mortgage rates,” Mr. Marion said in a research note.

However, he insists that there is no need for the Bank of Canada to pursue aggressive rate hikes in the next 18 months.

“This means that even if a correction is likely, current conditions do not herald a major decline,” the strategist said.

He is comfortable with the 6% correction implied by the forward market on the Teranet-National Bank home price index between now and 2012.