U.S. bank warning of 5% -10% correction

by |

Brokers have benefited from a surprisingly strong real estate market this year, but 2012 is threatening to present them with a much different reality, according to a new report by Bank of America Merrill Lynch.

The report, published this week by economists Ryan Bohren and Sheryl King, said Canadian home prices will fall at least by 5 per cent in the first half of 2012. But nationwide, the authors estimated Canadian home prices are overvalued by 10 per cent.

This is not the first, nor most extreme prediction of downward prices in 2012 for Canada. David Madani of Capital Economics last year predicted a 25 per cent to 35 per cent collapse in prices. But it’s part of a growing call for concern.

“In our view, the housing market is one of the most vulnerable sectors in this weakening economic environment, showing classic signs of overvaluation, speculation and over supply,” said Bohren and King. “We are not calling for an all-out rout in the market – but caution is now decidedly warranted.

The Canadian Real Estate Association put the average price nationally of a home at $360,396 in November. A 10 per cent drop would knock off $36,000 from the average price of a home.

Bohren and King voiced particular concern over the Toronto condo market, which they said has enough units coming on line soon to satisfy demand for the next five years. They’re drawing comparisons to the pre-collapse U.S. market.

Still, CREA data suggest that mortgage broker commissions should be protected next year by rising prices – not falling ones.

The national real estate market is balanced heading into 2012, but leaning toward sellers, according to a report released last week.

Sales were up for a third straight month in November, and activity rose in 60 per cent of all local markets. Average home prices are also up 4.6 per cent from a year ago, albeit the smallest increase since January.

“The Canadian housing market is proving resilient in the face of ongoing global economic and financial uncertainty, to the benefit of Canadian economic growth,” said Gary Morse, CREA’s president.
That modest growth suggests mortgage brokers will see relatively stable compensation on new originations and not the dip some had feared, given a slowing economy.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions