Investors fear impact of oil crash, correction coming

Record low oil prices have re-ignited housing correction talk as an analyst with Capital Economics has upped his prediction to a 30 per cent overvaluation in Canada’s two most expensive cities.

“Lower mortgage rates have enabled Canada’s key housing markets to defy gravity for the past few years,” said economist David Madani in a recent National Post article. “But with prices rising dangerously high relative to household incomes, there is the potential for a large correction down the road.

“The Vancouver and Toronto housing markets appear to be enjoying a revival of late, in contrast to most other markets in Canada. But with labour market conditions set to deteriorate this year and market bond yields expected to climb over the longer term, they won’t defy gravity for much longer.”

With oil prices pushing the economy to the brink of a recession and Calgary currently undergoing housing corrections, according to the latest figures, Madani believes that household incomes and rents have been separated from house prices.

For months, analysts have been speculating about how much the housing market will be affected by oil prices and interest rate cuts as a weak economic picture has affected home prices and sales across the country.

“New immigrants definitely bring vitality to the real estate industry and we’re seeing the low to mid-range markets almost completely unaffected. In fact, there are still multiple offers on these types of homes.

“Over the past many years, these oil prices have had an impact, but certainly do not control our nouveau economy. But overall, (the talk) just keeps the real estate professionals on their toes, and forces us, pleasantly, to adjust and develop our skills constantly to serve the predominant marketplace."

In Madani’s assessment of the market, he added that the average price for a house with mortgage payments based on the latest five-year fixed rate will take 64 per cent of household income in Vancouver and 40 per cent in Toronto.

“Although mortgage rates have been declining for the past few years and could dip lower should the Bank of Canada cut rates further, we expect this trend to reverse as market forces push Canadian bond yields higher over the next few years,” he was quoted as saying in the Post. “Under these circumstances, we expect house prices to fall.”
 

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