http://business.financialpost.com/2...10-drop-in-home-prices-in-first-half-of-2012/
Look for 5% to 10% drop in home prices in first half of 2012
Christine Dobby Dec 19, 2011 – 2:30 PM ET | Last Updated: Dec 19, 2011 3:36 PM ET
REUTERS/Mark Blinch
REUTERS/Mark Blinch
Canadian housing prices are likely to drop between 5% and 10% in the first half of 2012, according to a research report from
With a gloomy outlook for the Canadian housing market, which they see as overvalued and flooded with supply, economists at Bank of America Merrill Lynch are warning that home prices are likely to drop between 5% and 10% in the first half of 2012.
Ryan Bohren and Sheryl King, Canadian economists at the bank, have taken a bearish stance on the real estate market before, warning of a possible 15% correction to the Toronto condo market in an October report.
In a report on the outlook for housing in 2012, Mr. Bohren and Ms. King noted that while Canada is somewhat shielded from the situation in Europe, it is not immune to it and the economic fallout could worsen if unemployment creeps up to 8%.
“In our view, the housing market is one of the most vulnerable sectors to this weakening economic environment, showing classic signs of overvaluation, speculation and oversupply,” they said in the report published Friday. “We are not calling for an all-out rout in the market, but caution is now decidedly warranted.”
What’s more, they said, using their fair-value model for average home prices, that takes into account disposable income and interest rates, home prices in Canada are about 10% overvalued. In their view, this is due to record low mortgage rates allowing households to leverage more than ever before.
“Lower interest rates explain a significant portion of elevated household leverage ratios,” Mr. Bohren and Ms. King noted.
In 1982, for example, for every $1 of income available for borrowing, the average household could borrow $6; now, that same $1 can be levered up to $20, the authors noted.
They also pointed to longer maximum amortization periods as a factor in inflated valuations.
“If mortgage rules were reverted back to where they were in 2000 and the maximum amortization for an insured mortgage was 25-years, instead of the current 30-years, we believe home prices would be almost 20% overvalued,” the authors said.
“If we removed both of these effects [low rates and longer amortization periods] on our fair value model, home prices would look about 35% overvalued,” they said.
As for the outlook for next year, their base case scenario, to which they assign a 50% probability, is for a soft landing for the housing market. They see home prices dropping by about 5% in the near term but rebounding in the second half of the year to end 2012 about flat.
Their more adverse outcome, to which they assign a 40% probability, is based on a global recession and sharp drop in commodity demand, pushing the Canadian economy into “outright recession” and unemployment up to 8% from its current level of 7.4%.
Linked as it is to jobs and income growth, expect a hard landing for the housing market under this scenario, the authors said.
A spike in the unemployment rate under the bearish outlook would likely result in a rise in mortgage delinquencies and forced selling, producing a decline in home prices of about 10%, they said.
For investors eyeing the sector, the authors noted that shares in Canadian home builders and non-bank financials with direct exposure to the housing market turned negative in April and could fall further in 2012,
Their base scenario is probably priced into the 30% decline home builder stocks have already experienced since an April high, the authors said.
“However, housing sensitive financial stocks are only down 13% from April and will likely fall further as home prices and home sale activity slows into 2012,” they added.
Their more adverse scenario could mean a further 20% decline for both home builders and housing sensitive financial stocks.
Along the same venue as Ka1's globe and mail report. Note. This is not new, just a rehash of their previous prediction.
So, as I understand it: soft landing 50% chance with 5-10% decline and recovery by end of year.
40% hard landing. I guess that means 10% status quo or increase. I think that covers just about everything, just a question of how much these particular economists guess probabilities. Let's face it, it is just guess work.
I find it difficult enough to predict a logical trend, let alone assign probabilities. I guess they can claim they were right at the end of the year no matter what happens.(barring a huge price increase).
I am actually a bit more hopeful. Everyone is so down on Europe and expecting everything to be so bad in N.America next year, maybe there will finally be some resolution and some improvement though a lot of problems still will exist.
