Housing correction to fix 'unhealthy' market: Desjardins

A new report from Desjardins' economics team says a slowdown in domestic housing could in fact be a good thing for the Canadian economy. In a note to clients Tuesday, Desjardins Chief Economist and Strategist Jimmy Jean said moderation off historic highs could bring the residential real estate market back to some semblance of balance, thus reducing overall risks to financial stability. “Canadian housing is coming out of two years of torrid activity. Some might even say it’s a bubble market,” he said. “As the market cools, we can expect to see more rational expectations, less erosion of affordability, and yes, slower growth—all healthy side effects. Absent a recession, rebalancing should be manageable from a macro or financial system perspective.” The domestic residential real estate market has been a key crutch for the Canadian economy in recent years, accounting for about 10 per cent of overall gross domestic product. That reliance on housing leaves Canada particularly exposed to a downturn in prices and activity, threatening to kick out an important leg of the economy as rates rise. Jean said that the current rate-hiking cycle could spell trouble due to the impact of housing on overall economic output, as the Bank of Canada seems on track to continue increasing its benchmark rate from the current 1.50 per cent towards a terminal rate somewhere in the mid-two per cent range. "Now that inflation has veered out of control and the Bank of Canada has had to take aggressiveaction to get rates back to neutral, housing’s prominence in Canada’s economy will likely mean a significant slowdown,” he said. That’s already beginning to be borne out as Canadian home prices have fallen sequentially for the last two months, after hitting a non-seasonally adjusted record of $816,720 in February, according to the Canadian Real Estate Association. Desjardins has forecast prices could fall as much as 15 per cent from peak to trough, though would remain above pre-pandemic levels. In any case, Desjardins said a correction could help return some semblance of sanity to a market that has seen homes appreciate more than 50 per cent in some markets during the pandemic, becoming unmoored from economic and wage fundamentals. “The trends over the last two years were both unsustainable and unhealthy. Buyers competing against each other felt compelled to submit bids well above asking prices. Some even bought sight unseen. In some markets, home inspection contingencies disappeared from offers,” Jean said. “This effectively increased prices for buyers by shifting the cost of repairing any home defects to them. And many first-time homebuyers turned to the Bank of Mom and Dad to afford swelling down payments, something previous generations didn’t have to do to the same extent.” And with new housing stock being in short supply – on top of the federal government’s ambitious immigration goals – Jean said Canada needs to focus on building more housing in order to ensure it can meet economic growth targets. “Lack of supply will be one of Canada’s major economic challenges for years to come, and we’ll continue to need a multi-pronged approach to address it.”