Real Estate Experts Are Anticipating A Market Slowdown
Contingent on who you question, you will find varying viewpoints on when and how the Canadian real estate market will calm down from its latest meteoric rise. For instance, TD Bank economist Pascal Gauthier bluntly said in an discussion with “Globe and Mail” this month that even though real estate prices will continue to increase by 9% over the 2009 figures until the middle of 2011, they will then sharply drop — possibly down to 2.7 percent. But a nationwide housing breakdown is not assured, counters BMO Capital Markets’ economist Sal Guatieri, who points out to “The Montreal Gazette” that when the real estate bubble finally bursts, it should simply disturb major cities. One thing they both appear to agree on, however, is that the Canadian housing sector is on course for a cooling trend — the debate is just how much and how soon.
As Guatieri pointed out, today’s prices for average homes in Vancouver or Toronto — about $700,000 — is approaching 10 times the homeowner’s income, but that in a normal market “a more normal price is about four or five times income”. Although TD Bank had originally forecast 1.6% increases in 2011, this type of real estate feverish inflation in the middle of recession recovery has in fact hurt the market, and they are already witnessing the signs of slow down this year derived from the rise of new housing starts and new listings. Even though condo buildings in municipalities like Mississauga are climbing sales of Mississauga condominiums may begin to decline.
But TD did have to admit in their talk with “The Vancouver Sun” that their 2009 projections were short, because they did not anticipate “a move by buyers and sellers to pre-empt regulatory and interest-rate changes” that resulted in a sharp first quarter surge in real estate sales. This surge, especially in Ontario and British Columbia, comes from the July deadline in those provinces for the HST tax to take effect. The shift has influenced financing costs already, with the Bank of Canada believed to increase their overnight target rate in June or July from the record setting low of 0.25 percent. Higher borrowing rates could affect cottage regions with lower values for areas like Wasaga Beach real estate and this might constitute an opportunity for buyers.
As household incomes catch up with the level of inflation — a whopping 8 percent over the past 8 years — TD predicts that overvalued housing prices will carry on falling from 15 to 10 percent by the end of next year. This is bolstered by a drop in MLS sales, that as well includes Toronto MLS listings, over the previous 6 months that the Canadian Real Estate Association has noticed. The sole question that is left is what impact the inflated prices will have on the housing sector as a whole in the near term and in the future.
Gauthier explains his projections are a consequence of the “stronger supply response,” and that the “market balance is now expected to be somewhat softer next year, consistent with market conditions more favorable to potential buyers and a mild depreciation in home values”. However Guatieri thinks the approaching cool down period will not necessarily mean that housing values will indeed drop, but predicts it as a slow adjustment following the recent surge. One fact both Guatieri and Gauthier do envision in the future, though, is that irregardless of when it strikes, the cooling shift will not last for good, and inside of 3 years the average home price in Canada should find a balance and return to its fair market prices.
