Sunday, 15 September 2013

Canadian Home Prices to Decline by 15% - Sun Life

The recent up swing in the Canadian housing market is nothing but a dead cat bounce according to Sadiq Adatia, Chief Investment Officer of Sun Life Global.

Mr Adatia predicts that Canadian home prices will drop by 10% to 15% over time as interest rates rise.

This past July the average home price in Canada was $382,373 according to CREA.

A price drop of 10% would mean that the average home price would decline by $38,237

A price drop of 15%  - $57,355

A price drop of 20% - $76,474 which would bring the average home price in Canada to $305,898

I think Sun Life's CIO is being overly optimistic with regards to the price declines that lie ahead. As Canada's housing bubble bursts and fully deflates I expect prices to decline north of 20% over time. In my view, prices will return to pre-2008 levels in real terms.

The following chart visualizes real home prices in Canada with price drops of 10%, 15% and 20% over short term. Even a 20% decline will not fully deflate the Canadian housing bubble.

But when will Canada's housing bubble burst? It will take time!

Anyways, let's take a quick glance at what would a 15% correction in Toronto's housing market would look like.

The average price of detached home in the City of Toronto this past August was $783,708.

A 10% drop in value - $78,370

A 15% drop in value - $117,556

A 20% drop in value - $156,741 which would bring the average detached price down to $626, 966

For all those who doubt that detached homes in Toronto will drop in price by 20% then please consider that in 2008, detached homes in Toronto were hit the worst as they dropped by 25% in value.

The average price of condominium apartments in the City of Toronto this past August was $357,572.

A 10% drop in value - $35,757

A 15% drop in value - $53,635

A 20% drop in value - $71,514 which would bring the average condo price down to $286,057



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