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Winnipeg Free Press - PRINT EDITION

Report predicts housing correction

Prices due to drop 10%, Scotiabank says

By: Julian Beltrame

Posted: 08/9/2012 1:00 AM | Comments: 0

TORONTO -- Canadian house prices are due for a 10 per cent correction -- and likely even more in overheated Toronto and Vancouver -- but will likely avoid a U.S.-style collapse, according to a Scotiabank report.

Economists from the bank said in a report Wednesday average Canadian house prices will likely experience a cumulative 10 per cent drop in the next two to three years as demand softens.

Toronto and Vancouver, where average prices are well above the national average, could suffer an even steeper decline as oversupply and affordability issues turn the cities into buyer's markets.

"Record prices combined with incremental regulatory tightening are reducing affordability and the housing market's earlier momentum," economists Aron Gampel, Adrienne Warren and Mary Webb report. "Pent-up demand has been effectively exhausted after a decade-long housing boom, with Canadian home ownership at record levels."

The housing market has been particularly busy in the years since the 2008-09 recession -- after the Bank of Canada moved to lower interest rates to ultra-low levels to stimulate domestic spending. The fragility of the global economic recovery has pressured the central bank to keep rates at one per cent.

Low lending rates have also encouraged many buyers to find a home before they rise, leading to bidding wars, higher home prices and warnings some homeowners may find it difficult to service their debts when interest rates inevitably rise.

However, the Scotiabank (TSX:BNS) economists don't believe Canada is at the same precipice the United States faced in 2007 prior to the subprime mortgage debacle, although they warn the "downside risks" are increasing.

They note despite record household debt of 152 per cent of disposable income, the other metrics of homeowner finances remain in safe territory. Homeowner equity in real estate holdings averages 67 per cent, compared to 41 per cent in the U.S., and mortgage delinquency rates are low and falling.

The overall housing stock is not notably overbuilt, they add, with the inventory of unsold homes above the long-term average, but showing signs of levelling off to below the peaks of the early 1990s.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition August 9, 2012 A6

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