Housing market won’t crash in 2014

Clients can breathe a sigh of relief. The Canadian housing market will not crash in 2014.

Why? Because “we’re not in a bubble; therefore we aren’t calling for a meaningful correction,” says Sal Guatieri, senior economist at BMO Capital Markets.

“It’s almost like the housing market has nine lives,” adds Benjamin Tal, deputy chief economist of CIBC World Markets. “Every time it’s supposed to slow down, something happens that keeps it going.”

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Instead, experts predict a steadier market in 2014.

“Last year, we saw a big drop in sales after tighter mortgage rules,” says Guatieri. “This year, we saw a surprisingly strong rebound in activity. So we’re expecting a more subdued market next year.”

Tal agrees that thanks to the government’s efforts in the mortgage market, activity will be moderate. “We’re seeing first-time homebuyers being priced out of the market due to affordability.”

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And in certain overvalued pockets, prices may decrease slightly.

“In urban areas, including Montreal, Vancouver and Toronto, we’ve already seen a correction,” says Tal. “But we haven’t seen a big correction because people weren’t selling, so supply went down.”

With limited supply, sellers were able to keep prices steady. But that will change in 2014, says Tal. There’s an abundance of supply, especially in the condo market, as a result of more building this year.

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Guatieri agrees. “There are quite a few condos in the Toronto pipeline under construction that we think will continue to weigh on prices, which have flattened out in the last few years.”

So sellers will have to decrease prices and buyers may be able to get a bargain.

Meanwhile, housing prices may go up in Calgary, where the job market is strong.

“Calgary is benefiting from in migration,” says Guatieri. “People are attracted due to low unemployment rates, solid job growth and high paying jobs, as well as more affordable housing markets than Toronto or Vancouver. We expect increases in house prices, though not the 8% we saw this year.”

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And fewer developers will launch projects across Canada. “Builders are expected to limit the number of housing starts while inventories of unabsorbed units, completed and under construction, are drawn down,” says Mathieu Laberge, deputy chief economist for CMHC.

As for interest rates, Guatieri predicts BoC won’t change course for the fourth consecutive year.

“We don’t see Bank of Canada moving rates until early 2015,” he says. “But that doesn’t mean that longer-term interest rates won’t move higher. This is because the U.S. economy will strengthen and Canada’s economy will also grow faster next year. This will put further strain on affordability and cool the markets in Toronto and Vancouver.”

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So where’s the opportunity for investors?

“If you’re looking for capital appreciation, it’s going to be more difficult to find,” says Tal. “However, there’s a significant demand for rental units and we’ll see more young people gravitating towards downtown areas and big cities. Therefore, we’ll see demand for rental units and rents rising.”