Pacific Investment Management Co. forecasts Canadian home prices falling as much as 20 per cent in the next five years, removing the boost from household spending that contributed to faster than- expected growth last quarter, reports the Ottawa Citizen.
“Canadian housing is overvalued,” said Ed Devlin, the London-based head of Pimco’s Canadian portfolio. “I would expect to see it happening at the end of this year, we’re going to start to see housing roll over.”
The housing decline, which could be cancelled out or reduced to 10 per cent when accounting for inflation, will cause a pullback in consumer spending, capping economic growth this year in Canada at around two per cent, Devlin said.
“It’s not a collapse, it’s a correction. We think the Canadian economy can handle it,” said Devlin. “It’s going to be a headwind to consumption as people don’t have the same kind of wealth effect and are more anxious about their house than they have been in the past. They’ll consume less.”
Such a correction would likely shrink margins for brokers but also allow more clients to enter the market.
The forecast furthers sentiments expressed in Thursday's CMHC second quarter housing outlook report, which expects 2014 and 2015 to experience a soft landing.