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What it would take for Canada's housing market to crash, and why Pimco says it won’t

Posted on Feb 6, 2014 in Mortgage Market Updates and News

Michael Babad
http://www.theglobeandmail.com/authors/michael-babad
The Globe and Mail

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Pimco on housing

The world’s biggest bond fund manager expects a “cyclical decline” in Canada’s housing market, but says there’s little chance of a meltdown.

We touched on the comments from Pimco late yesterday, but, given the angst surrounding the residential real estate market, thought we’d go for a deeper look this morning.

“There has been much media attention on Canada’s housing market lately, with some forecasters calling for ‘the bubble’ to pop in 2014,” Pimco says in latest look at Canada.

“While we think the housing market in Canada is overvalued and due for a correction, the correction will likely happen over several years.”

That said, Pimco’s Ed Devlin, the chief of Canadian portfolio management, believes the decline will begin this year, though he stresses that a correction is not “a bubble bursting in a disorderly manner.”

Several Canadian economists are also calling for a slowdown, rather than a meltdown.

One of three things would have to happen this year to spark a full-on bust, Pimco’s Ed Devlin says:

1. Interest rates would have to spike sharply, which simply isn’t in the cards. The Bank of Canada isn’t anywhere near a rate hike, and in fact has left the door open to a cut from its current policy rate of 1 per cent. “With real growth of about 2 per cent and a relatively subdued inflation forecast, we see no reason for interest rates to substantially rise in 2014.”

2. Unemployment would have to spike. While the jobless rate isn’t projected to decline – rather, it’s expected to hover around the 7-per-cent mark – it’s not forecast to surge either. “Given this macroeconomic environment, it is also unlikely that the unemployment rate will spike to 8 per cent to 10 per cent (which, we estimate, would be needed to cause a disorderly housing correction).”

3. Mortgage credit would have to be “disrupted.” Also not in the cards. “The Canadian banking system continues to provide sufficient mortgage credit to keep the housing market financed.”

Over all, Pimco sees “modestly” higher mortgage rates, tighter mortgage rules, an ongoing “modest” economic rebound, and still-stretched property values.

All of which means home prices will erode this year, and sales will slip, but that’s about as far as it goes.


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