VANCOUVER — Canada is in the grip of a recession that will see housing prices deflate about 10 per cent nationally and perhaps up to 20 per cent in British Columbia, according to Benjamin Tal, a senior economist at CIBC World Markets.
"People say we are entering a recession, I'm saying we're in a recession," Tal said in an interview Monday following a presentation to the Canadian Association of Accredited Mortgage Professionals (CAAMP).
He said Canada's recession was sparked by slowing growth in the wake of the meltdown of U.S. housing markets. The economy will not begin to recover until American real estate bottoms out, the financial sector stabilizes and until government economic stimulus packages take hold.
Tal said that could be sometime around May next year.
He cautioned that recovery will not be a robust "V-shaped" bounce-back. Rather it will take more of a "U-shape" and will take some time.
Tal said Canada's housing downturn is a recession-led correction rather than the kind of meltdown that brought U.S. markets low when large numbers of high-risk borrowers defaulted on their loans.
Tal said B.C. is likely to see deeper corrections in real estate prices, largely because values here shot up so much higher and more quickly that in other parts of the country.
"When you double the value of your real estate over the course of breakfast, then you pay the price," Tal said.
He said the recession still has to run its course, and was in the equivalent of "the sixth or seventh inning" of a baseball game.
Tal told about 1,800 mortgage brokers at the Vancouver Convention and Exhibition Centre that people need a context to give them an overall picture of all the bad economic news.
The prominent economist started his presentation with a subtle joke. He launched into a recitation of the gloomy headlines about the world, the United States, Europe and even Canada being in recession, about the 1.5 million jobs lost in the U.S. and the American meltdown. He followed that up with a cheery, "Good morning, everyone."
Tal said the world is dealing with its biggest financial crisis since the Great Depression, but that doesn't mean the impact will be as significant as that of the Depression.
One reason is that the U.S. Federal Reserve, the Bank of Canada and European banks stepped in quickly with bailout packages and assistance for the financial sector, he said, and governments have also been fast off the mark proposing stimulus spending on infrastructure projects.
Those measures will buy the jobs needed to get countries out of recession, he said.
However, given that the recession was caused by a buildup in American real estate markets that took 15 years to develop, "the recovery will not be strong," he said. "It will be a much more modest recovery, because you cannot undo 15 years of bad economic management in one or two years."
The Canadian real estate market did become overvalued, Tal said. However, over the past six months it has gone from being a hot seller's market to a more balanced market, he added, projecting that over the next few months it will correct further into a buyer's market, something not seen in Canada since 1995.
"A mere five to seven per cent drop in prices from current levels should bring the national average back to equilibrium," he said. "That's a mere fraction of the 25 per cent overshooting seen in the U.S. by mid-2006."
The triggers that led to the free fall in U.S. home prices, or Canada's last housing market bust in the early 1990s, do not exist in Canada today, Tal said, rejecting a recent warning by another investment firm of a U.S. style meltdown here and an earlier projection that home prices in some major Canadian cities would have to fall by 25 per cent to bring them back into balance.
The collapse in the Canadian housing market in the early 1990s resulted from a sharp increase in interest rates by the Bank of Canada, which reduced housing affordability, Tal said, adding it would take a doubling of today's mortgage rates to match the drop in affordability that occurred then.
The current housing market recession in the U.S. was triggered by a variety of factors, key ones being a much heavier household debt burden and a much larger proportion of subprime mortgages there, he said.
"Eradicate subprime from the U.S. housing market and, instead of the most severe house price meltdown since the Great Depression, you get a trivial moderate cyclical slowing -- something along the line of what we are experiencing here," Tal said.
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