Housing market seen following commodities

[ErickMontreal]

Housing market seen following commodities

Value of building permits drops. Homes in Montreal, elsewhere overvalued by 10%, Merrill Lynch economist says

ALIA MCMULLEN, Canwest News Service

Published: 8 hours ago

An outright decline in commodity prices could spell disaster for Canada's housing market, which already appears to have entered a "sustained downturn," David Wolf, an economist at Merrill Lynch Canada, warned yesterday.

 

He said while the risk of a housing market crash was small, an "outright bust" in commodity prices would make the scenario "a rather more serious threat."

 

The recent trickle of data has shown a significant slowdown in the country's housing market, following its record pace of growth. Demand has eased, supply continues to creep up, credit conditions remain tight, and house-price growth has turned flat with declines in some regions.

 

The value of building permits in June fell a seasonally adjusted 5.3 per cent from the previous month, indicating that construction activity in the coming months probably will be lower, Statistics Canada figures showed yesterday. The data is notoriously volatile, but the trend rate of growth for residential building has declined since the beginning of the year.

 

"Canada's housing market is entering a sustained downturn, in our view," Wolf said. "It does look like Canadian houses finally got too expensive, and builders too aggressive, for the underlying demand environment."

 

He estimated that markets with the strongest price growth in recent years, such as Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton, Sudbury, Ont., and Montreal, were all more than 10 per cent overvalued. On a national basis, Wolf predicts house price growth to remain flat.

 

Merrill Lynch expects commodity prices to moderate over the medium term, a scenario that would aid in the housing market downturn but not cause an outright bust.

 

Others, such as the CIBC, have a more bullish forecast for commodities, namely oil, expecting prices to continue to rise. This would continue to support Canada's terms of trade by bringing in higher export revenue relative to the amount spent on imports.

 

But Wolf said the risk of a housing crash would become "a serious threat" if the recent correction in commodities continued because it could cause the terms of trade to deteriorate.

 

The price of light crude has fallen about 18 per cent since peaking at a record high of $147.27 U.S. a barrel on July 11. Light crude for September delivery settled at $120.02 U.S. a barrel in New York yesterday.

 

"The takeoff in commodity prices since 2002 has driven an enormous improvement in Canada's terms of trade, accounting for much of the strong growth in Canadian national income that has, in turn, provided the fundamental underpinning for the housing market boom," Wolf said.

 

A Bank of Canada working paper by senior analyst Hajime Tomura earlier this year argued that a decline in the terms of trade would likely cause house prices to fall. It said "if households are uncertain about the duration of an improvement in the terms of trade, then house prices will abruptly drop when the terms of trade stop improving."