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Housing market braces for correction, not crash

John Partridge – Globe and Mail

Average Canadian house prices will fall by another 3% in 2009, but the drop will add up to a “correction,” not the sort of “crash” that has crushed the U.S. market, real estate brokerage Royal LePage Real Estate Services said Tuesday.

Nationally, the average house price will fall to $295,000, from a projected level of $304,000 for 2008, the Toronto-based firm forecast. This follows a 1.1% dip last year from $307,265 in 2007.

Royal LePage also is betting that that the number of houses sold across the country this year will fall by 3.5% to 416,000, although it expects to see both price and activity gains in several markets, including Regina and Winnipeg, where prices remain below the national average.

But price increases of 6% and 4% the firm is forecasting for the two prairie cities – bringing the average up to $243,300 and $204,900, respectively – will be a mere shadow of the 38.6% and 20.5% gains they saw last year.

As well, Royal LePage is forecasting that more Canadians will lose their homes, as foreclosure rates increase, but that this increase will remain “very limited,” especially compared with the U.S. experience.

It argued in a news release that Canada’s “relatively insignificant” subprime mortgage market means only a “low number” of Canadians are carrying “very risky mortgages,” and that, as a result, the foreclosure rate will not climb enough to have an impact on prices and sales activity.

However, the Globe and Mail reported last month that Canadian banks, trust companies, credit unions and other lenders issued an estimated $56-billion in 40-year mortgages with minimal down payments – seen by critics as being as risky as subprime loans – in the first six months of 2008. Banking and insurance sources told the newspaper that this represented more than half the total new mortgages advanced by the lenders during this period.

As well, David Wolf, Merrill Lynch’s head Canadian economist and strategist, warned in September that too much leverage in Canadian households could be a “tipping point” for a U.S.-style crash, while BMO Nesbitt Burns Inc. deputy-chief economist Douglas Porter said Canada’s housing market could “take it on the chin” if the U.S. recession proves to be a deep one.

Still, other economists, such as real estate specialist Adrienne Warren at Bank of Nova Scotia and Benjamin Tal at Canadian Imperial Bank of Commerce, share similar views to Royal LePage. The firm’s chief executive officer Phil Soper reiterated in the news release Tuesday that it sees no great cause for alarm.

“While Canada’s housing market is anticipated to continue to move through a period of adjustment over the next six months, we should expect modestly lower home prices, not a U.S.-style collapse, which was brought on by a structural failure of the entire American credit system,” he said in a news release.

“Most consumers are not aware that nationally, Canadian housing market activity peaked in 2007 and has been adjusting lower since. We are well into this inevitable cyclical correction.”

The plunge in the U.S. real estate market has been altogether more dramatic.

Some of the most recent evidence came Dec. 30, when it was revealed that the Standard & Poor’s/Case-Shiller 20-city U.S. housing index fell by a record 18% from October last year, the largest drop since its inception in 2000. The 10-city index tumbled 19.1%, its biggest decline in its 21-year history, according to the Associated Press.

Both indices have recorded year-over-year declines for 22 straight months. Prices are at levels not seen since March 2004, AP said.

Prices in the 20-city index have plummeted more than 23.4% from their peak in July 2006. The 10-city index has fallen 25% since its peak in June 2006.

By contrast, Vancouver, which Royal LePage called Canada’s “most expensive city,” will likely experience a 9% drop in average prices to $540,100 this year, the steepest decline anywhere in the country. But the correction will be a “natural cyclical reaction” to nearly a decade of above-average increases, it said.

Secondary markets in Ontario also will likely endure greater than average dips in prices and sales activity, thanks to continued slowdowns and jobs losses in the manufacturing sector.

Among other major markets, Toronto is likely looking at a 4% drop to $364,800, the firm said, while Ottawa and Edmonton remain unchanged, with average house prices staying at $291,000 and $333,000, respectively.

Average prices will likely drop by 1% in both Montreal and Calgary, to $254,400 and $402,000, respectively.

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Contact Laurin Jeffrey for more information – 416-388-1960


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