The Toronto and Vancouver housing markets are on the brink of a "severe downturn" that could hurt the country's GDP and drag home prices down by up to 40 per cent, a Capital Economics economist says.
"I see a correction between 20-40 per cent in the Canadian housing market in five years," David Madani, senior Canadian economist at Capital Economics, told Business News Network on Monday.
He suggests there will be a slight dip in Toronto housing prices before the end of the year, but that's all it will take to scare many homeowners into cashing out of the market.
"Once prices stop going up, the whole reason for speculating in the market disappears," he told BNN. "Sales have slumped. Usually, prices follow sales."
Vancouver and Toronto housing markets have been white-hot for the last few years, but experts have been sounding the alarm about a possible correction in market prices on the horizon. Last week, for instance, the Organization for Economic Co-operation and Development urged Canada to do more to address the risky Toronto and Vancouver housing markets. The warning came shortly after the International Monetary Fund urged Canada to protect against a possible correction.
Madani warned Capital Economics subscribers about the possible downturn in a newsletter on Friday. He said tough regulations are expected to strangle a recent rebound in Vancouver's home prices, while Toronto will likely experience a price correction amid its current slowdown in sales.
"The housing market appears on the verge of a downturn and will negatively impact economic growth from the second quarter onwards," Madani wrote. He warned that a recent uptick in Vancouver home sales is a "head fake," and that Toronto's current sales slump suggests housing prices "could decline outright before year end," which would put a damper on household consumption in late 2017.
"The economic outlook for this year and next appears to be worsening," he wrote.
Madani says the proof is in the latest housing data from the Real Estate Board of Greater Vancouver and the Toronto Real Estate Board. He says the ratio of sales to new home listings is falling, which would indicate that a decline in prices is on the way.
Home sales in Vancouver surged 22.8 per cent from April to May of this year, but remain 8.5 per cent lower than last year's record-high in May of 2016. New listings fell 3.9 per cent year-over-year in May, but jumped up 23.2 per cent when compared to April 2017.
Madani says the short-term uptick has been due to slightly lower mortgage rates, but the effect of that bump has already begun to fade.
"With Vancouver's housing market still severely overvalued and tougher mortgage insurance rules introduced late last year now in full force, we doubt this uptick in home sales will last," he wrote.
Toronto's cooling market has been much more evident, with home sales down 20.3 per cent from May 2016 to last month. Detached home sales were down 26.3 per cent, while condo sales dipped by 6.4 per cent, according to TREB data.
Realosophy president and broker John Pasalis suggests the numbers may be even more dire for June, based on his own early number-crunching in the Greater Toronto Area. He says house sales were down 44 per cent for the week ending June 9, when compared to the same period last year. New listings for houses were up 34 per cent for the same period. In terms of condos, Pasalis says sales fell by 22 per cent, while new listings rose by 11 per cent year-over-year last week.
"People are just pulling back," he told BNN on Monday. He added that the rapid decline in sales is even more troubling than the sudden rise in inventory.
Madani blames the dip in Toronto sales on tougher mortgage insurance rules, stricter provincial regulations on rent control and a new tax on foreign buyers.
"Considering that Toronto accounts for 20 per cent of the national housing market, this slump in sales will hit national second-quarter GDP, subtracting as much as 0.5 percentage points," he wrote.
"All things considered, the housing market appears to be teetering on the brink of a downturn, which is a bad sign for GDP growth prospects," he wrote.
On Monday, Madani advised against young people investing their money in a home, particularly since their equity could go up "in a puff of smoke" if home prices start falling.
Madani echoed those sentiments on Monday. "Getting into the home ownership market right now is extremely risky," he said.
He added that while his expertise lies in real estate, he prefers renting over buying.
"I'm a happy renter," he said. "It's less expensive, but I'm also saving and investing in other things."
With files from the Business News Network