Canada’s longest housing boom of the post-war period has come to an end, and there is further downside risk to real estate values, according to a Scotia Economics report released on Thursday.

The softening of the market has been most pronounced in the hot markets of Western Canada, but conditions in virtually all regions are tilting back in favour of buyers for the first time in years, according to the report.

Still, the Canadian housing market is not in as much trouble as its U.S. counterpart. The report notes key differences in the fundamentals of Canada’s housing market relative to the United States.

For one, the inventory of for-sale homes in both the new and resale market, while moving up, is still well contained relative to prior cycles. Construction is beginning to slow in most jurisdictions, and with a low risk of widespread foreclosures, the Canadian market does not face the massive inventory glut underlying the record-setting price declines in the United States.

“We argue against taking an overly alarmist view to domestic housing prospects,” said Adrienne Warren, senior economist and real estate market specialist at Scotia Economics. “This is not a ‘U.S.-style’ bust caused by overbuilding, speculative buying and imprudent lending, but rather a cyclical slowdown accompanied by a valuation adjustment in several large centres where booming demand conditions and temporary supply constraints led to an overshooting in prices.”

Canada’s mortgage market is also much healthier than the one south of the border, with a much smaller sub-prime exposure, less interest rate reset risk, lower use of home equity withdrawal and investor mortgages, and more conservative lending criteria, Warren notes.

The report also contrasts the Canadian situation with other countries around the world, and shows that price appreciation in both Canada and the United states has in fact been relatively modest by international standards.

In the past 10 years, real house price appreciation totaled a cumulative 61% in Canada and 50% in the United States. The run-up was considerably larger in Ireland, the U.K., Spain, France and Australia, all of which experienced increases exceeding 100% in the same period.

Real price growth for 2008 appears to have decelerated sharply or turned negative in all 10 countries considered, including Canada.

Supply levels and credit conditions are important factors that will continue to drive down prices, according to the report.

“There is further downside risk to home prices in Canada, especially in light of reduced growth and employment prospects,” said Warren. She expects the correction in national average prices from their late-2007 peak to be a 10% to 15%, a drop “well below the ongoing U.S. retrenchment.”

Much of the realignment will occur the Western provinces, and will leave intact most of the significant price appreciation of recent years.

“Longer-term, the process of gradual housing price deflation globally may well be more pronounced outside of North America, including Ireland, Spain, the U.K. and Australia,” Warren said.

IE