CIBC: Canadian Housing Market Overshooting Fundamentals, Soft Landing Expected

CIBC is out with research article here

House prices in Canada rose by 5.5% (year-over-year) in October following a 6.5% increase in September. By province, the largest increase was in Saskatchewan, followed by Ontario.
Mortgages outstanding are now rising by 7% (year-over-year), while the mortgage arrears rate has stabilized at close to 0.4%.

Our assessment is that relative to rent, income and demographics, house prices in Canada are over-shooting. But the fact that prices are overvalued today does not necessarily mean that they will crash tomorrow. After all, a violent market correction needs a trigger such as the sub-prime crisis, which ignited the US real estate meltdown, or abnormally high interest rates as was the case during the 1991 property crash in Canada. That is not on the horizon this time around. The Bank of Canada is very clear about its intention to move slowly, with the first rate hike not expected before late 2012. As well, any objective assessment of the quality of the existing mortgage portfolio in Canada reveals a relatively balanced mortgage market with a small segment of marginal borrowers.

 Accordingly, while we do not see house prices crashing, we do believe that the housing market in Canada will stagnate in the coming year or two. Further out, the most likely scenario is that the eventual increase in interest rates will lead to a modest decline in prices (probably in the magnitude of 10%). But given relatively modest rate hikes and the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years — paving the way for a healthier housing market later in the decade.

 Indeed a flattening in house prices in the next year or so is a necessary condition for such a soft lending scenario. If the pace of house price increases accelerates during that period, then twelve months from now the likelihood of a violent price correction will be higher than it is now.

It should be pretty interesting to see how much mortgage credit was taken out in Saskatchewan for 2011.  I'll stick my neck out and say over $7 Billion.
In 2005, the total value of mortgages taken out was $2,749,000,000
In 2010, the total value of mortgages taken out was $6,665,500,000
The increase in the average weekly wage in the same time was 22%

And even though GDP in Saskatchewan has grown considerably in the last six years.  Mortgage debt relative to GDP has DOUBLED!  The positive feedback loop with real estate has translated into an economy that is more reliant on real estate now than before.