Many say the Canadian Housing market won't crash..... Here's why.

January 31, 2014

The world’s biggest bond fund manager expects a “cyclical decline” in Canada’s housing market, but says there’s little chance of a meltdown.

We touched on the comments from Pimco late yesterday, but, given the angst surrounding the residential real estate market, thought we’d go for a deeper look this morning.

“There has been much media attention on Canada’s housing market lately, with some forecasters calling for ‘the bubble’ to pop in 2014,” Pimco says in latest look at Canada.

“While we think the housing market in Canada is overvalued and due for a correction, the correction will likely happen over several years.”

That said, Pimco’s Ed Devlin, the chief of Canadian portfolio management, believes the decline will begin this year, though he stresses that a correction is not “a bubble bursting in a disorderly manner.”

Several Canadian economists are also calling for a slowdown, rather than a meltdown.

One of three things would have to happen this year to spark a full-on bust, Pimco’s Ed Devlin says:

1. Interest rates would have to spike sharply, which simply isn’t in the cards. The Bank of Canada isn’t anywhere near a rate hike, and in fact has left the door open to a cut from its current policy rate of 1 per cent. “With real growth of about 2 per cent and a relatively subdued inflation forecast, we see no reason for interest rates to substantially rise in 2014.”

2. Unemployment would have to spike. While the jobless rate isn’t projected to decline – rather, it’s expected to hover around the 7-per-cent mark – it’s not forecast to surge either. “Given this macroeconomic environment, it is also unlikely that the unemployment rate will spike to 8 per cent to 10 per cent (which, we estimate, would be needed to cause a disorderly housing correction).”

3. Mortgage credit would have to be “disrupted.” Also not in the cards. “The Canadian banking system continues to provide sufficient mortgage credit to keep the housing market financed.”

Over all, Pimco sees “modestly” higher mortgage rates, tighter mortgage rules, an ongoing “modest” economic rebound, and still-stretched property values.

All of which means home prices will erode this year, and sales will slip, but that’s about as far as it goes.

• Read the Pimco post
• Why are so many people saying nasty things about Canada’s housing market?
• Tara Perkins: Home sales up 13{ea18e790148ddb141722068dfb73f9f74b06205fa18c7d39ece0e7144d0672b8} in December fro a year ago, down for month
• Tara Perkins: Canadian home prices return to record high
  Economy expands 0.2 per cent
  Canada’s economy continues to chug along.

Gross domestic product expanded 0.2 per cent in November from October, marking the fifth month in a row of gains, albeit at a slower pace than the previous two months, Statistics Canada said today.

Goods production rose 0.4 per cent, while the service sector lagged at 0.2 per cent, the federal agency said.

The mining and energy sectors led the gains, while manufacturing slipped 0.5 per cent and construction 0.1 per cent, The Globe and Mail’s Barrie McKenna reports.

The details of the report were better than the overall number might otherwise suggest, economists noted.

“While looking somewhat deep into the rear-view mirror, the decent month continues to point to a sturdy end to 2013 for the Canadian economy,” said chief economist Douglas Porter of Bank of Montreal.

“The three-month trend in growth is now running at a nifty 3.8-per-cent annualized clip, and output is up 2.6 per cent from a year ago,” he said in a research note.

“However, we look for a setback in next month’s report, as the brutal December weather (notably the ice storm in Ontario) is expected to produce a GDP decline for that month. Still, with the solid start to the quarter, we continue to look for Q4 growth of a bit better than the Bank of Canada’s latest estimate of 2.5 per cent.”

Keystone report expected
The U.S. State department is expected to release as early as today a crucial environmental assessment of TransCanada Corp.’s proposed Keystone XL pipeline, a move that would start a 90-day clock ticking towards a final decision, The Globe and Mail’s Shawn McCarthy reports.

The Canadian government is anticipating a positive report, saying the pipeline would not add significantly to greenhouse gas emissions because the oil sands would be developed with or without the pipeline.

The State Department won’t provide a recommendation to the White House based on its report, but will only the report will only assess whether the project would cause significant environmental damage.

The pipeline has been hung up for years, and the Canadian company has been forced to reroute the proposed line amid widespread opposition and environmental concerns.

Wal-Mart warns on profit
Wal-Mart Stores Inc. sent something of a chill into the retail sector today with a warning that its fourth-quarter results are now expected to lag.

The giant retailer cited hits from a cut in benefits to the U.S. Supplemental Nutrition Assistance Program, better known as food stamps, and poor winter weather. There are also hits from international store closures and a restructuring to its Sam’s Club operations.

Wal-Mart now projects underlying earnings per share to come in “at or slightly below the low end of our range of $1.60 to $1.70,” its chief financial officer said.

For the year, it projects the same for its earlier range of $5.11 to $5.21.

“Despite a holiday season that delivered positive comps, two factors contributed to lower comp sales performance for the 14-week period for Wa-Mart U.S.,” Charles Holley said.

“First, the sales impact from the reduction in SNAP (the U.S. government Supplemental Nutrition Assistance Program) benefits that went into effect Nov. 1 is greater than we expected. And, second, eight named winter storms resulted in store closures that impacted traffic throughout the quarter.”

via Globe and Mail