CIBC economist says local real estate market bucking national “softening” trend


Always somewhere in the middle among Canada’s 25 major centres is how Benjamin Tal, the managing director and deputy chief economist for CIBC World Markets, describes Winnipeg’s economy and housing market.
“Winnipeg will never be last and it will never be first,” said Tal, who was the keynote speaker at the 2012 WinnipegREALTORS® forecast breakfast at Canada Inns Polo Park last Wednesday.
According to a recent CIBC index on economic performance, which aggregates nine economic variables into one measure, Winnipeg ranked 12th among Canada’s 25 largest cities, coming in 11th in change in percentage of MLS® average price and 18th in percentage of change in MLS® unit sales.
But being in the middle is good, he added, since Winnipeg will also never be subjected to the sudden downswings often experienced in other Canadian cities. 
Tal said the main reason the city is in the middle of the pack is that its economic structure is versatile, but growth is invariably slow and steady, unlike in other centres that are reliant upon a single resource, such as Calgary, where the oil industry is dominant and exposes the Alberta city to cyclical booms and busts.
While the housing markets in other major Canadian cities are “softening,” Winnipeg is so far bucking the trend, recording steady price increases, according to the CIBC economist.
WinnipegREALTORS® reported a six per cent average price increase over 2010 by the end of 2011 to $256,748.
Tal said Winnipeg’s real estate market has been driven primarily by low interest rates which are expected to remain in place for at least two years.
“Credit is important in Winnipeg,” Tal said.
“Winnipeg is very sensitive to interest rate increases,” he added, so what happens down the road to interest rates will have an effect on the city’s housing market. 
But Tal also said Bank of Canada Governor Mark Carney has no intention of raising interest rates for some time.
When the central bank does raise interest rates (perhaps in two year’s time), they won’t be crippling, according to Tal.
“Carney won’t repeat past mistakes, such as in 1991 when high interest rates killed the housing market.”
In February 1991, Canada’s average interest rate reached an historical high of 16 per cent. The Bank of Canada then underwent a significant change, implementing inflation-targeting to combat the double-digit interest rates that plagued the country during the 1980s. Since then, it has maintained the rate of inflation between one and three per cent. 
Tal is also confident a U.S.-style housing bubble is “not going to happen” in Canada, because Carney won’t let it happen.
Besides, said the expert on the Canadian, U.S. and overseas housing markets, the conditions leading to the American housing collapse are not present in Canada.
He said the ratio of risky mortgage debt at the time of the U.S. housing bubble burst was at 22 per cent, while it’s now just 4.5 per cent in Canada.
“I don’t see a cliff or a cloud (over the horizon),” he said.
Carney said some parts of the nation’s housing market, especially Vancouver and Toronto, may be “overvalued,” so the Bank of Canada will remain vigilant. 
In addition, Carney has expressed concern over the level of household debt. As a portion of annual disposable (after-tax) income, debt reached 152.98 per cent in 2011’s third quarter, up from 150.57 in the second quarter of the year, according to Statistics Canada. The central bank governor and federal Finance Minister Jim Flaherty have been urging Canadians to get a handle on their household debts.
Tal said the bulk of household debt in Canada is mortgages — 70 per cent — but they are paid over a 25-year period, not one year, he has continually told the media.
What matters is the amount of annual income required to service a household debt. While 40 per cent is probably too high, a more manageable figure would be 30 per cent of annual income.
People should also be aware of how much debt they can handle in the event of an interest rate increase, which will eventually occur, he added.
Despite the concerns expressed, when the Bank of Canada made its recent announcement not to raise its rate, it reported “very favourable financing conditions are expected to buttress consumer spending and housing activity.”
A number of financial institutions recently dropped their five-year lending rate to a record low of 2.99 per cent, which is down considerably from the advertised five-year rate of 5.29 per cent when the central bank met last year on December 6. 
“The bottom line is that the bank (of Canada) rate is not going to go up anytime soon, and we may see rates lowered should downside risks (form European debt issues) materialize,” said Canadian Real Estate Association chief economist Gregory Klump.
Overall, said Tal, the Canadian real estate market, including Winnipeg’s, will “not be as exciting” over the next couple of years, as it had been in 2010 and 2011.
“While we do not see housing prices crashing, we do believe that house prices in Canada will level off in the near future and might start trending downward modestly,” Tal said in a report for the CIBC Economics publication, In Focus. “Further out, the most likely scenario is that the eventual increase in interest rates will lead to 
a decline in prices (probably in the magnitude of 10 to 15 per cent).
“But given the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years — paving the way for a healthier housing market later in the decade,” Tal added.