CEO welcomes drop in local housing prices

Red- hot Vancouver market is ‘ not sustainable’; prices fell 9.8 per cent in April from year earlier

Housing price increases in Toronto and Vancouver in the last decade aren’t sustainable and recent declines are welcome, according to Lindsay Gordon, chief executive of HSBC Holdings PLC’S Canadian arm.

“When you look at prices in Toronto and Vancouver on a price- to- income, or price- to- rent ratio, they are high by global standards,” Gordon said Thursday in an interview after a speech to the Canadian Club of Montreal.

“Is it a bubble? Nobody knows what a bubble is until it’s burst. I think the level in increase in prices in housing in Toronto and Vancouver is not sustainable.”

Canadian home prices, which have climbed to an average $ 350,000 from less than $ 300,000 at the start of 2009, have a “limited upside” and are at risk of a correction “in the near or medium term,” Toronto- based ratings company DBRS Ltd. said on Thursday.

Average prices in Vancouver fell 9.8 per cent in April from a year ago, the Canadian Real Estate Association said May 15. Prices in Toronto rose 8.4 per cent over the same period.

“The market is slowing down,” Gordon said.

“The supply and demand is quite balanced at the moment.

“The modest correction we are seeing in the upper end in Vancouver is quite welcome.”

HSBC’S forecast calls for Canada’s economy to expand two per cent this year and as much as 2.5 per cent next year, Gordon said. HSBC’S Vancouverbased Canadian unit reported a 42- per- cent rise in profit for the quarter that ended March 31 to $ 202 million.

Gordon said the bank doesn’t expect to see “materially” higher interest rates in the next year.

Bank of Canada governor Mark Carney has kept his key lending rate unchanged at one per cent since September 2010 in the longest pause since the 1950s.

Carney and Finance Minister Jim Flaherty have warned in recent months that Canadians may be taking on too much debt. Gordon echoed those concerns, saying consumer debt poses a risk to the economy because a decline in housing prices could make homeowners curtail spending.

“Consumer debt levels, mortgage levels, house prices are a risk because of the knock- on impact they have on the economy,” he said. “For most people, a home is typically their largest piece of net worth. The wealth effect is the risk. People’s cash flow might not have changed, but the wealth effect means they won’t spend as much.”