Ed Devlin, PIMCO’s head of Canadian investing, told BNN that the firm is predicting a home-price drop between 5% and 10% over the next five years. However, he said, a correction of that kind wouldn’t necessarily have a knock-on effect on the broader economy.
“If you think about that in real terms, adjusting for inflation, that actually gets you a negative return of about 20%,” Devlin told BNN. “That would be the kind of correction that would take the majority of the froth out of the market and still not be the kind of thing that would lead to a Canadian recession.”
Devlin told BNN that PIMCO predicts that single-family home prices in the booming Toronto and Vancouver markets would be hit hardest by a correction.
“What we’re watching very closely for the Vancouver market is some of the reforms going on in China in terms of clamping down on capital flight and corruption,” he said. “I think for Toronto, it’s simply a sense of valuation getting a little bit too frothy.”
Devlin write on the PIMCO website that Canadian housing process would collapse only in the event of a sharp interest-rate hike, a large increase in unemployment or a disruption of mortgage credit.
Devlin told BNN that with the U.S. Federal Reserve finally ready to raise interest rates after keeping them near zero for almost seven years, Canadian rates are also likely to rise. That could lead to lower consumer spending and a small increase in mortgage defaults, he said.
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