Market set for 20 per cent correction?

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The Canadian housing market is set for a potential 20 per cent correction over the next five years, according to the head of Canadian portfolio management for a global investment firm.

"In nominal terms, I see it flat to down 10 per cent," Ed Devlin, executive vice president and head of Canadian portfolio management for PIMCO said to the Globe and Mail. "And if you get that kind of 10-, 20-per-cent real correction, that should alleviate some of the stresses."

Earlier this year, Devlin published a report that forecasted a decline in activity and housing prices in 2014; though it is expected to come in the form of a correction as opposed to a crash.

"The combination of modestly higher mortgage rates, tighter mortgage underwriting standards, a continued modest economic recovery and a housing market where valuations are stretched will result in a decline in housing activity and housing prices in 2014, but not a crash," Devlin wrote in his housing market analysis entitled “All Things in Moderation, Including Housing.”

In his analysis, Devlin pointed to a number of factors he expects to contribute to the decline.

"First, higher housing prices show the market is more stretched than in previous years. Second, the four rounds of mortgage credit tightening implemented by the federal government are now more clearly having the desired effect,” Devlin wrote. “Finally, we expect the cost of capital at Canadian banks to rise in 2014 due to regulatory changes and expect the banks to pass on these higher costs to consumers in the form of modestly higher mortgage rates."

PIMCO was founded in 1971 and according to its most recent release, currently has $1.91 trillion in assets under management.

Devlin, who is responsible for PIMCO’s Canadian portfolio strategies and economic outlook also believes the overnight rate will remain at its longstanding benchmark of one per cent for the rest of the year.

"We do not think the Bank of Canada will cut the overnight policy rate from one per cent in 2014,” Devlin said. “Despite core inflation flirting with the Bank of Canada’s 1% lower band recently, well-anchored inflation expectations and higher import prices (caused by the weaker Canadian dollar) will likely cause core inflation to increase in 2014, preventing an easing of monetary policy."
 
  • John Van Driel on 2014-03-04 11:38:25 AM

    If we get a 20% correction, the banks couldn't keep up with their "underwater demands" for additional equity! We could all get jobs as appraisers, and collectors!!

  • Salim J Kanji HLCHomeLoans Canada on 2014-03-04 12:14:52 PM

    Haveing been underwriting mortgages for many years, I have noticed that the business has not slowed down, however, what has happened is that the clients are now prepared to pay higher interest rates from the alternative sources. They come to the table already with a mind set that they will have to pay premium for the mortgages should they not qualify with an A lender. An Educated customer is aware of what is going on in the market and that the Regulators have a hand to play as well.
    Yes, We are due for a correction and that is what we have been saying for the past 10 years or so!

  • Salim J Kanji HLCHomeLoans Canada on 2014-03-04 12:14:53 PM

    Haveing been underwriting mortgages for many years, I have noticed that the business has not slowed down, however, what has happened is that the clients are now prepared to pay higher interest rates from the alternative sources. They come to the table already with a mind set that they will have to pay premium for the mortgages should they not qualify with an A lender. An Educated customer is aware of what is going on in the market and that the Regulators have a hand to play as well.
    Yes, We are due for a correction and that is what we have been saying for the past 10 years or so!

  • Paul Mangion on 2014-03-04 5:04:02 PM

    As long as inventory stays low I doubt there will be anywhere near a 10% decrease in prices. It will certainly flatten out which would be a good thing.

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