BMO’s Gregory Says Canada Housing in for Soft Landing

Canada’s housing market will have a “soft landing” after years of strong gains and recent steps by policy makers to curb demand, said Michael Gregory, senior economist at BMO Capital Markets.

“Things don’t look too out of whack” for housing and consumer finances, he told investors during an economist panel discussion at the Bloomberg Focus Day Symposium in Toronto. “Housing is going to cool, a soft landing still seems to be unfolding,” he said.

Finance Minister Jim Flaherty has tightened lending rules and sought greater control over the country’s housing agency on concerns about overbuilding of condos in Toronto and Vancouver. While Flaherty has said in recent months that his moves should be enough to prevent a bubble, existing home sales have risen for seven straight months and housing starts increased 5.3 percent in September, led by condos.

Risks remain in the housing market even after the tighter regulations, according to others on the panel including Eric Lascelles, chief economist at RBC Global Asset Management.

“There is clearly quite an excess on the condo side across the country but with obvious relevance to Toronto” for new construction, he said. “It points to particular weakness in that area, but not of a systemic variety.”

Canada’s ratio of debt to disposable income reached a record 163.4 percent in the second quarter. Recent gains in the housing market have been driven by consumers “spooked” by signs mortgage rates would rise and diminish the potential for future growth, said Derek Holt, vice president of economics at Bank of Nova Scotia.

Lofty Premiums

“We are still at very lofty premiums, record high 70 percent home ownership rate, record high debt-to-income ratio, record high renovation spending,” Holt said.

“I don’t think we will go down the U.S. path because our mortgage market is fundamentally different,” he said of the housing market. “It’s a moderating period, and it’s part of that not-terrible-but-Canada-underperformance story compared to the U.S.”

Holt said the Bank of Canada, which has kept its policy interest rate at 1 percent since September 2010 to boost demand, may stay on hold until at least late in 2015.

Governor Stephen Poloz is counting on a shift in demand to business investment and exports from debt-fueled consumer spending. At a Sept. 18 press conference in Vancouver, Poloz said “I don’t perceive that there is a bubble in Canada’s housing market.”

Real Estate

The Bloomberg Nanos Canadian Confidence Index showed views on real estate deteriorated last week, with 36.6 percent polled predicting increased real estate values in their neighborhood, down from 38.1 percent a week earlier.

The central bank may raise the key interest rate to 1.5 percent by the end of next year because of momentum in the economy and concerns about housing, said Derek Burleton, deputy chief economist at Toronto-Dominion Bank.

“Who would have thought we would be in this low interest rate environment for so long,” Burleton said.

The Bank of Canada may raise interest rates before the U.S. Federal Reserve at a pace modest enough to avoid any housing crash, said Gregory of BMO Capital Markets.

“Housing markets don’t crash in and of themselves, something has to happen, unless you have a pool of bad mortgages, which of course we don’t have,” he said. “We aren’t going to have any major drag on the economy coming from housing.”

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