Investors fear impact of oil crash, correction coming

by Jordan Maxwell31 Jul 2015
Record low oil prices have re-ignited housing correction talk, and the latest alarm bell comes from an analyst at Capital Economics who cites a 30% overvaluation in Canada’s two most expensive cities.

“Lower mortgage rates have enabled Canada’s key housing markets to defy gravity for the past few years,” said economist David Madani in a recent National Post article. “But with prices rising dangerously high relative to household incomes, there is the potential for a large correction down the road.

“The Vancouver and Toronto housing markets appear to be enjoying a revival of late, in contrast to most other markets in Canada. But with labour market conditions set to deteriorate this year and market bond yields expected to climb over the longer-term, they won’t defy gravity for much longer.”

With oil prices pushing the economy to the brink of a recession and Calgary currently undergoing housing corrections, according to the latest figures, Madani believes that house prices have been separated from household incomes and rents. In his assessment of the market, he reckons average mortgage payments based on the latest five-year fixed rate will take 64% per cent of household income in Vancouver and 40% in Toronto.

“Although mortgage rates have been declining for the past few years and could dip lower should the Bank of Canada cut rates further, we expect this trend to reverse as market forces push Canadian bond yields higher over the next few years,” he was quoted as saying in the Post. “Under these circumstances, we expect house prices to fall.”

For months, analysts have been speculating on how much the housing market will be affected by oil prices and interest-rate cuts as a weak economic picture has affected home prices and sales across the country. But at the agent level, it’s not all bad.

“The market is stable,” Akbar Nimji, a real estate agent with Re/Max in Calgary, told CREW.  “New immigrants definitely bring vitality to the real estate industry and we’re seeing the low to mid-range markets remain almost completely unaffected. In fact, there are still multiple offers on these types of homes.

“These oil prices have had an impact, but certainly don’t control our economy. Overall, (the talk) just keeps the real estate professionals on their toes, and forces us to adjust and develop our skills constantly to serve the predominant marketplace."

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