Housing correction underway in Canada, ‘soft landing’ likely: bankers

Canada’s housing correction “appears to be underway,” Toronto-Dominion Bank’s chief economist said Tuesday, one day after data showed national home sales plummeted in August.

Craig Alexander and a team of economists said a combination of market fatigue, stricter mortgage lending and a deterioration in housing affordability are behind a slowdown in Canadian home sales.

The comments come a day after the Canadian Real Estate Association said home sales fell 5.8% in August from July, and were down 8.9% year over year.

“For some time now, TD Economics has been warning that the Canadian housing market was overpriced and overbuilt, setting the stage for a gradual correction to take place over the medium term,” Mr. Alexander said in a report, co-authored by economists Derek Burleton and Diana Petramala.

“The tide seems to have finally turned,” Mr. Alexander said

The finding comes as the chief executive of Bank of Nova Scotia said Tuesday the housing decline does not mean fears of a housing crash are about to be realized.

“What we see now is probably, at worst, a soft landing,” Rick Waugh told reporters after an address to business leaders in Toronto.

Senior executives at the country’s third-biggest bank by assets have looked at ongoing evidence of a slowdown in some cities and they’re not surprised by what they are seeing, Mr. Waugh said.

The numbers are “well within our expectations,” he said.

Unlike the U.S. and Europe that are dealing with the fallout of severe real estate downturns, Canada is protected by the strength of the domestic economy and the banking system, which mostly avoided fallout from the financial crisis, Mr. Waugh said.

TD’s warning on housing was part of a broader outlook on the Canadian economy, which Mr. Alexander concluded was “stuck in a soft patch.”

He said a weak global economy, fatigued consumers and debt-laden governments would weigh down the Canadian economy for the rest of the year.

“Canada’s economy appears to be at a crossroads,” Mr. Alexander said. “After ramping up spending during the recession and recovery, fatigued households and deficit-laden governments have recently been shifting their attention to restraint.”

Consumer and government spending made up 90% of Canada’s gross domestic product in 2011, but Mr. Alexander warned that both segments are exhausted from massive debt.

Household debt is currently at 152% of personal disposable income in Canada, a level that is close to the 160% threshold that U.S. and British consumers experienced right before the financial crisis.

“In light of pressures to ease debt burdens and grow spending more in line with gains in income and/or revenue, the contribution to real GDP from consumer and government spending declined notably during the first half of 2012,” Mr. Alexander said.

Given the curb in spending, Mr. Alexander expects Canada’s economy to grow by only 1.8% this year before seeing slightly stronger growth above 2% in both 2013 and 2014.

Another factor hurting growth this year is a lack of business investment, something that Bank of Canada governor Mark Carney lambasted during a speech last month.

“While exports and business investment had appeared poised to do more heavy lifting this year, this transition has been delayed by ongoing global uncertainty, an elevated exchange rate and softening commodity markets,” Mr. Alexander said.

But while prospects for growth in 2012 seem gloomy, Mr. Alexander concludes that next year will see a pick up. He expects the export and investment outlook to improve as the global economy begins to accelerate next year.

As well, he said, businesses could finally begin boosting capital spending in 2013, given strong balance sheets and the need to become more competitive once the global economy improves.

That outlook means the Bank of Canada will start increasing interest rates next year, Mr. Alexander said, expecting a 50-basis-point hike next year, thereby bringing the central bank’s benchmark rate to 1.5% by the end of 2013.

He expects a similar 50-basis-point hike in 2014.

“With the Canadian economy growing at what is believed to be its cruising speed limit of close to 2%, even TD Economics’ relatively soft near-term economic forecast is consistent with gradual rate s over the next couple of year,” he said.

Source: Financial Post