Housing cooling off

Jim McLeod July 22, 2011

The time may be right for Canadian homeowners to consider selling as industry experts forecast that prices should soon hit a peak and at best flatten — if not undergo precipitous declines — over the next few years.

The Royal Bank (TSX:RY) forecast Thursday that the Canadian market will return to a period of much slower sales and pricing growth the like of which has not been seen for about 15 years.

“Going forward, the housing market will look much like the second half of 1990s, with minimum growth in resales and minimum growth if any in terms of pricing,” senior economist Robert Hogue said in an interview.

In its housing market outlook report released Thursday, the bank forecast that home resales will grow by 0.9 per cent this year and remain unchanged in 2012, while home prices will increase by 4.4 per cent this year and a slight 0.4 per cent in 2012.

That would mark a moderation or cooling off from strong growth enjoyed between 2002 and 2008. That period was followed by volatility caused by the global recession and domestic policy changes — such as a sharp drop in interest rates, three rounds of mortgage rule changes and the introduction of the HST in Ontario and British Columbia.

“We are taking a more sanguine view on the economy than other analysts out there,” Hogue noted.

RBC expects Canada’s economy will grow by about three per cent this year and next and continue to generate more jobs and income to offset the cooling effect from higher interest rates.

“It’s more of a soft landing, kind of flattening trends than actual declines.”

The bank’s July forecast is similar to its past outlooks and reflects a view of many of Canada’s chartered banks and the Bank of Canada.

However, TD recently forecast that prices will decrease by 10 per cent over the next two years, accompanied by a 15 per cent decline in sales.

Economist David Madani of Capital Economics has a more pessimistic view about the Canadian housing market. He said prices are unsustainable and will drop by 25 per cent over the next three years or so.

A major correction is likely because values driven up by the psychology of ever increasing prices are simply out of whack with the fundamentals of stagnant household incomes and impending increases in interest rates.

“Moderation we think is probably a bit overly optimistic. We’re expecting something more severe than that, which will of course hit the economy fairly hard,” he said from Toronto.

Falling house prices would lead to outright declines in residential investment, consumer confidence and household net worth.

These types of negative shocks have historically prompted the scaling back of consumption to rebuild savings. That would hit the economy fairly hard with overall GDP growth, Madani added.

“We just think this is going to have an unhappy ending. Quite frankly, given what’s happened in other parts of the world, not just the U.S., you’ve got to think that there’s a significant chance of this happening.”

The RBC economist was reluctant to forecast changes too far into the future, but said he doubts the exceptional growth of demand and prices early in the decade will be replicated any time soon.

“I think we’re probably in it for a fairly extended period of a much less sexy housing market in Canada.”

Extract from the Red Deer Advocate, July 22nd.

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