U.S. bank report predicts 5% drop in home values

The report, published this week by economists Ryan Bohren and Sheryl King, said Canadian home prices will fall at least by 5% in the first half of 2012. But nationwide, the authors estimated Canadian home prices are overvalued by 10%.


This is not the first, nor most extreme prediction of downward prices in 2012 for Canada. David Madani of Capital Economics last year predicted a 25%-35% collapse in price. But it’s part of a growing call for concern.

“In our view, the housing market is one of the most vulnerable sectors in this weakening economic environment, showing classic signs of overvaluation, speculation and over supply,” said Bohren and King. “We are not calling for an all out rout in the market – but caution is now decidedly warranted.
The Canadian Real Estate Association put the average price nationally of a home at $360,396 in November. A 10% drop would knock off $36,000 from the average price of a home.
Bohren and King voiced particular concern over the Toronto condo market, which they said has enough units coming online soon to satisfy demand for the next five years. They saw comparisons to the pre-collapse U.S. market.
“As a comparison U.S. home building ran for about five years 35% above the rate of underlying natural demand, before it all ended in tears,” said the report. “An increase in the unemployment rate, will likely lead to a pull-back in housing demand which will in turn expose this market as oversupplied.”
Bohren and King estimated there will not be enough renters in Toronto to occupy the units under construction, leaving some investors with vacancies on their hands. Ultimately, that will put a downward pressure on prices, they said.
Overall, the national real estate market would be much worse without the help of rates and amortization regulations, said the report.
Home values would be 35% overvalued if interest rates were up to a more normal level of 5% for a five-year fixed mortgage instead of the current 3.3% and the maximum amortization for an insured mortgage was 25 years instead of the current 30, said the report.

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