Canadian home prices are likely to decline 10 per cent over the next two to three years before facing a period of “prolonged” softness and lower demand, says a new report from Scotia Economics.
“The correction will be concentrated in the Toronto and Vancouver markets, where supply risks and affordability pressures have the potential to trigger larger price adjustments,” says the report by Scotiabank’s Global Economic Research Group.
There are signs that Toronto’s condo market “is beginning to self-correct” with a sharp downturn in sales in the second quarter of 2012. Prices are likely to moderate and a record inventory of unsold units is likely to force some developers to delay or cancel some planned projects, it notes.
Vancouver’s notoriously overheated housing market is now seeing a 20 per cent decline in demand over long-term trends and prices are likely to follow, the report notes.
Toronto may not be far behind: Sales remain 10 per cent above historic averages and the short supply of detached homes in particular continues to drive up prices. (The average price of a detached home in the GTA hit almost $600,000 in July. A detached in the 416 area was up to $752,4310, according to the Toronto Real Estate Board.)
“This is beginning to present affordability challenges, and raises the risk of a bigger price correction down the road,” says Scotiabank’s report.
Pent-up demand for housing has been “effectively exhausted” right across Canada by the decade-long housing boom, fuelled by historically low interest rates, which has helped push home ownership to record levels, the report notes.
Other “downside risks” of the housing market are Ottawa’s tightened mortgage lending rules — the move to restrict repayment to 25 years instead of 40 years — high household debt and interest rates that have only up to go, it says.
Just shaving 15 years off the maximum allowable amortization period has added about $387 to the monthly carrying costs on an average-sized home for buyers with just a 5 per cent down payment, notes Scotiabank’s economists.
“Even beyond mid-decade, Canada’s housing sector faces the likelihood of a prolonged period of relatively modest sales and price gains,” the report says.
“Historically, long cycles of rising home prices have been followed by extended periods of persistent softness, allowing affordability to be gradually restored and generating renewed pent-up demand.”
Those downturns after the housing booms in the 1970s and 1980s — defined as periods of flat or negative real price growth — lasted 8 and 9 years, respectively, it notes.
“Canada’s housing market is expected to avoid the sharp downturn witnessed in the United States and Europe,” it stresses, adding that “Canadian household balance sheets remain in reasonably good shape.”
The equity Canadians have in real estate averages 67 per cent compared to just 41 per cent in the United States, which helped leave homeowners there particularly vulnerable when house prices took their dramatic downturn.