Risk of major housing price correction very low
Unmistakable signs of cooling are appearing in the Canadian real estate market, but the chance of a big drop in prices is “very low,” according to an analysis from Scotia Capital.
“After many false calls, there is now convincing evidence that Canada’s real estate market has come off the boil,” writes Scotia economist Adrienne Warren.
Warren cites a confluence of indicators to argue her case for cooling:
* Home sales are falling nationally.
* Demand for residential building permits has plunged.
* Average annual price increases are steadily easing back from the 10% increases that marked the boom years of 2002 to 2007.
* Inventories of unsold new homes are trending higher.
* But Warren does not see the same kind of price drops that followed the last two real estate booms. In those booms, peak-to-trough selling prices plunged by 24% and 15%.
“However, we believe the current cycle has less downside risk, as it appears to be built on a stronger economic foundation than those of the 1970s and 1980s,” she says.
Warren lists five main reasons why this time should be different:
* Home prices in Canada are not overvalued.
* There’s little evidence of widespread speculation.
* Canada’s real estate market is not overbuilt.
* Households are not over-leveraged, noting that mortgage carrying costs as a share of disposable income are historically low.
* Overall mortgage quality is still sound, as Canadian lending standards are tighter than those in the U.S.
Warren predicts a “soft landing” for the Canadian real estate market, with “a period of relatively flat inflation-adjusted home prices.”
She acknowledges that there are risks to her forecast if the U.S. economic slump turns out to be deeper or longer-lasting than currently predicted.
“Tighter credit conditions and heightened global financial market volatility in the wake of the U.S. sub-prime mess pose additional downside risks to the sector’s overall performance.”
The Scotia report came a day after the Canadian Real Estate Association released figures that showed the number of resales in Canada’s major markets fell 6.1% from a year earlier. Average selling prices were up by 3.2% year-over-year – the slowest pace of increase in more than six years.
The number of new listings was also at a record high.
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