Home prices to fall 10 per cent: Scotiabank

It's now been a year or more since economists began forecasting a slowdown, and maybe a slump, in the Canadian housing market, but thus far there are only marginal signs that it's happening.

Is this a good thing? Maybe not.

Whether you're an optimist or a pessimist, there really is a wide range of agreement that home prices are somewhat overdone in this country. If that's true, then it stands to reason that the longer prices rise, the more chance we have of a significant downturn.

Referring to the prospects for future price moves, Scotiabank economist Adrienne Warren said this week that "we were in the relatively flat camp about six months ago, but since then the picture has changed."

Now, she and her colleagues believe, a slowing global economy and Canada's tightened mortgage lending rules have dimmed the outlook significantly. They're calling for a drop of roughly 10 per cent in average home prices over the next two or three years.

Some other analysts are less worried. Royal Bank economist Paul Ferley remains comfortable with that institution's prediction home prices will be roughly flat next year.

Typically, an overvalued housing market comes back into balance gradually, with prices remaining about flat while incomes rise enough to make homes more affordable.

But once the overvaluation goes beyond a certain point -- especially if there's some trigger, such as a big jump in interest rates or a recession that squeezes employment and incomes -- it is indeed possible to have a significant drop.

Housing, says Warren, "is an asset that can sometimes have big movements, and there's a lot of emotion in real estate markets."

And even though her bank's view has moved to the more pessimistic end of the spectrum over the last several months, Warren stresses she's not predicting anything like the housing bust seen in the United States.

This exceptional disaster has lasted six years, brought a collapse of more than 30 per cent in the average price of a U.S. home and greatly worsened the severity and length of that country's economic downturn.

Indeed, there's no recession at all in the outlook from Warren and her Scotiabank colleagues, just rather weak Canadian economic growth next year of 1.8 per cent. Unemployment could actually edge down a bit from today's 7.2 per cent, she said.

One reason for this is that the Canadian housing slump, if it happens, is likely to be concentrated in two very high-priced markets: Toronto and Vancouver.

There's a pretty good chance that if there really is a 10-per-cent drop in Canada's average home price, this average will be made up of bigger drops in these two cities and relative stability elsewhere.

With about 75 per cent of the housing market remaining healthy, the odds of a serious economic shock remain small, particularly since Canada's mortgage lenders haven't permitted most homeowners to become seriously overextended. Homeowner equity in this country averages 67 per cent, for instance, far above the 41 per cent average south of the border.

The housing market could hold up significantly better than the Scotiabank analysis predicts, depending partly on how the economy performs.

A key reason why the Royal Bank's home-price forecast is more optimistic is that its economic forecast is more upbeat. Rather than the sluggish 1.8-per-cent growth expected next year by Scotiabank, the Royal's Ferley anticipates a healthier 2.4 per cent pace. Even the Royal, however, warns that markets like Toronto and Vancouver look somewhat vulnerable.

However, these markets are now showing substantial cooling, which could help them correct with less distress.

-- Montreal Gazette

U.S. market bouncing back

PRICES for single-family homes climbed in most U.S. cities in the second quarter and values nationally jumped the most since 2006 as real estate markets stabilized.

The median sales price increased from a year earlier in 110 of 146 metropolitan areas measured, the National Association of Realtors reported Thursday. In the first quarter, 74 areas had gains.

U.S. housing prices are beginning to lift off the bottom after the worst housing slump since the 1930s as buyers compete for a tight supply of available properties. At the end of June, 2.39 million previously owned homes were available for sale, 24 per cent fewer than a year earlier, the Realtors said.

"The turnaround in home prices feels pretty broad," Celia Chen, a housing economist at Moody's Analytics in West Chester, Pa., said. "But I think there are still risks that home prices will dip a little more before they start appreciating with any consistency,"

The national median existing single-family home price was $181,500 in the second quarter, up 7.3 per cent from the same period last year, the strongest annual increase since the first quarter of 2006, according to the Realtors group.

-- Bloomberg News

Republished from the Winnipeg Free Press print edition August 10, 2012 B11