Housing prices will drop by about 10% over the next two to three years, and remain weak after that, suggest Scotia Economics in a new report.
Scotia indicates that national home sales and prices in Canada have cooled in the first half of 2012. “Record prices combined with incremental regulatory tightening are reducing affordability and the housing market’s earlier momentum, notwithstanding the lowest borrowing costs on record,” it says. And, it notes that pent-up demand has been effectively exhausted, putting Canadian home ownership at record levels.
Scotia says it does not see a U.S.-style crash in house prices, however it warns that the downside risks are increasing. Affordability will be increasingly strained when mortgage rates eventually drift up, it says, and the global outlook has become “much more challenging”, it notes.
The report indicates that the bank expects average Canadian home prices will eventually decline by a cumulative 10% over the next couple of years, as housing demand softens and buyers’ market conditions re-emerge for the first time in over a decade.
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,” it says, with more balanced conditions in many other regional markets.
This combination of lower home prices and reduced sales volumes also points to a further moderation in household credit growth, Scotia says. And, it notes that an extended slowdown in the housing sector “also entails large negative spillover effects to the broader economy, including consumer durables spending, renovation activity and employment.”
Looking beyond 2015, Scotia suggests that the housing sector “faces the likelihood of a prolonged period of relatively modest sales and price gains.” Previous housing booms of have been followed by flat or negative real price growth for eight or nine years, it notes.