25% price correction coming: Capital Economics

“We fear this adjustment is only just starting and anticipate that the resulting excess supply of homes for sale will eventually drive home prices down by as much as 25 per cent,” says research firm Capital Economics, in its most recent prediction for the Canadian housing market. “Home sales have slumped in recent months, not just in response to the tightening of mortgage lending standards”

That 25 per cent – almost double the figure being thrown out by bank economists -- may heighten the fear of Realtors, mortgage brokers and homeowners alike as they plan for the next 12 months.

Capital Economics is suggesting the coming year will effectively reverse as much as three years of value gains for homeowners in several Canadian markets. For many investors, it means  flipping has now been removed from their vocabulary, leaving the buy-and-hold strategy as their only real option. That’s for both long- and short-term returns.

That predicted damage is deeper and with more severe repercussions than what most economists are asking homeowners to brace for.

If Capital Economics is correct it also means that the government’s new tighter mortgage rules have had a more profound effect on home prices than even Ottawa had wanted. It also point to the uncertainty many consumers are now facing in terms of their own employment and their willingness to invest in homeownership.

For mortgage brokers and investors alike, it also suggests that the number of refinances – along with their values – will rapidly shrink.

Still, most economists remain convinced that the housing market will see a much more modest correction in prices and not the very gloomy 25 per cent Capital Economics is now forecasting.

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