Canada’s housing market is “at risk of a disorderly correction” according to the OECD’s latest semi-annual global economic outlook report.
The report predicts that “residential investment is likely to weaken since the housing stock seems greater than underlying demand” although Canada’s economy will still grow by 2.2% this year, 2.4% in 2014 and 2.7% in 2015 because of exports and business investment.
The OECD suggests that “should house-price pressures re-emerge, further macro-prudential measures may be needed to reduce risks to financial stability.” It recommends that Bank of Canada consider gradually hiking its policy interest rate, pegged at 1% since September 2010, beginning in the fourth quarter of 2014 until it reaches 2.25% by the end of 2015.
The central bank governor has openly disagreed with OECD. In recent testimony before the Senate, Bank of Canada governor Stephen Poloz argued that the most likely scenario will be a soft landing where home prices stabilize. He said the economy is improving and could accommodate more jobs. He added that bank lending practices are now more prudent and there is no serious overbuilding in the housing market.
“Our judgment is (the housing market) is a situation that is improving, this is not a bubble that exists here that would have to be corrected. If there is a disturbance from outside our country that's another analysis,” Poloz told the committee.
With an inflation of just 1.1% and an economy which still has a lot of slack, he said, “those things together give us the judgments we reach, and obviously they differ in a material way from what the OECD is saying... and it's our job to reach that final conclusion.” He said interest rates will likely need not be increased until 2015.
Following the OECD report, Fitch Ratings also released a study saying Canadian home prices, which are already overvalued by as much as 26% in some regions, could fall within the next five years by up to 10%. Once this happens, “with a high level of employment and individual net worth tied to the value of the housing stock, a housing downturn could have serious consequences for the overall economy.”
Rather than crash, Fitch Ratings predicts home prices will be making a “soft landing” because of mitigating factors like government’s proactive policies.
“Government awareness has appeared to be high," says Fitch, "and if the proactive policies specifically targeting a soft landing are successful, then flattening growth or modest decline scenarios become increasingly likely.”