Cracks appear in the real estate market
By Virginia Galt – Globe and Mail
The Canadian real estate boom is ending, but there is no “major correction” in the cards – and buyers are unlikely to see anything near the bargain-basement prices that currently characterize the United States housing market, the Bank of Nova Scotia said Thursday.
Canada Mortgage and Housing Corp., in its second-quarter outlook, reported Thursday that new home construction will begin to slow in 2008, “but remain high by historical standards.”
Both Scotiabank and CMHC said the Canadian housing market is fundamentally strong.
However, higher mortgage carrying costs “will be a catalyst for the decrease in residential construction to 214,650 units in 2008, from 228,343 in 2007,” CMHC said in its second quarter housing market outlook.
Bob Dugan, CMHC’s chief economist, added that most of the pent-up demand that built up during the 1990s “had now been fulfilled and residential construction activity will gradually move in line with Canadian demographic fundamentals.
“These factors will continue to exert downward pressure on housing starts, which will decline to 199,900 units in 2009,” Mr. Dugan said.
Scotiabank, looking at the resale market, reported that home resales – having fallen for four consecutive months – are running about 15% below last summer’s historic peak.
“Average annual home price appreciation has eased back into the mid single digits, as overall market conditions come into better balance,” according to the Scotiabank report.
“Adjusted for inflation, the average resale home price in Canada registered its first quarterly decline in seven years in the first quarter of 2008,” the bank said.
However, senior Scotiabank economist Adrienne Warren said in an interview that the softening real estate market is due to a “cyclical slowdown,” and the Canadian real estate market is “fundamentally stronger than the situation we’re seeing in the U.S.”
The cooling could bring eventually price relief to buyers, she said.
“The real estate market is becoming better balanced, so there will be more homes listed, which takes a little bit of pressure off prices,” Ms. Warren said.
“But it will take some time, and a number of years of fairly soft prices, in order to bring affordability back to the levels” that are typically seen at the beginning of an upward cycle, she said.
CMHC forecast that existing home sales, as measured by Multiple Listing Service, will fall by 8.5% in 2008 to 475,900 units, and the trend will continue in 2009, with a decrease to 465,000 units.
“Despite a slowdown in MLS(R) sales, demand remains strong by historical standards,” CMHC wrote. Average resale prices will increase by 5.1% to $323,000 in 2008, and by 3.3%, to $333,500 in 2009, CMHC projected.
In line with the CMHC report, Scotiabank noted that “cracks are appearing on the new home front as well.
“While housing starts in early 2008 are essentially tracking last year’s elevated levels, demand for new residential building permits has fallen sharply. Price increases for new homes are moderating, while inventories of unsold new homes are trending higher.”
Ms. Warren said she expects overall sales volumes in 2008 to be about 15% below last year’s record levels, and home prices to increase on average by about five%.
“Price gains should slow further in 2009 with the return of a balanced real estate market for the first time in a decade. Meanwhile, housing starts are projected to gradually moderate, returning toward underlying annual household formation levels of around 180,000 by the end of the decade, from the current 225,000 unit range,” Ms. Warren said.
The report also notes that the cooling in overall activity is most pronounced in many of Canada’s hottest urban real estate markets in recent years, including Calgary and Edmonton.
“Both centres have officially moved into buyers’ territory as soaring prices weaken demand and fuel new listings. More generally, however, economic conditions continue to favour the resource-rich markets in the West over manufacturing-dominated centres in Central Canada. Regina and Saskatoon are currently in the strongest sellers’ position nationally, supported by good affordability, rising population inflows and tight supply,” according to the report.
However, risk of a major correction is low, Ms. Warren said.
“Home prices in Canada are not substantially overvalued. Our long-term housing price model puts average home prices in 2007 at about 8% above their long-term trend, compared with a premium of 12% and 18%, respectively, at the 1976 and 1989 housing cycle peaks. Recent International Monetary Fund (IMF) estimates placed Canada at the bottom rungs of international home price overvaluation.”
Scotiabank also said in its report that Canada’s real estate market is not overbuilt.
“While inventories of unsold homes are trending higher, the number of unabsorbed units, including condominiums, remains well below prior cyclical peaks in most major centres. Tighter lending guidelines and high construction costs have likely contributed to a more cautious approach among builders.
Overall mortgage quality is still sound, Scotiabank said.
“Canada does not have ultra-low teaser rate mortgages that have contributed heavily to U.S. defaults as they reset. Adjustable-rate mortgages, sub-prime lending, borrowing against home equity, and insured investor mortgages all account for a much smaller share of the Canadian mortgage market than in the United States,” the report said.
At the end of the day, we predict a soft landing for the Canadian real estate market, with somewhat lower sales and construction, and a period of relatively flat inflation-adjusted home prices,” added Ms. Warren. “While underlying domestic housing fundamentals remain healthy, a major risk to the outlook would be a deeper and more protracted downturn in the U.S. economy, with more serious repercussions for domestic output, employment and income growth.”
- Canada’s housing market to spring forward in the early part of 2007 before falling back Solid early-year housing starts, home resales and price appreciation Western...
- Canadian housing market not in recovery yet The Canadian market is not at risk of collapsing, as...
- Housing starts to fall slightly in 2008 Housing starts reached 228,343 units in 2007, an increase of...
- Soft landing for new housing starts in 2007 and 2008 Housing starts will moderate this year to 209,500 units after...
- House listings begin to slow down By Lori Mcleod – Globe and Mail The supply side of...