November 19, 2008

Canadian residential real estate now a buyer’s market, according to Scotia Economics

Canada’s longest housing boom of the post-war period has come to an end, according to the latest Real Estate Trends report released today by Scotia Economics.

The reversal of fortune has been most pronounced in the previously hottest markets of Western Canada, including Calgary, Edmonton and Vancouver. Nonetheless, conditions in virtually all regions are tilting back in favour of buyers for the first time in years.

“We argue against taking an overly alarmist view to domestic housing prospects,” said Adrienne Warren, Senior Economist and Real Estate Market Specialist, 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.”

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.

With builders in most jurisdictions beginning to slow the pace of new construction, and with a low risk of widespread foreclosures, the Canadian market does not face the massive inventory glut underlying record-setting U.S. price declines.

The Canadian housing market in a global context

The report tracks real house prices across a number of major developed nations over a 10-year period, coinciding with the latest global housing cycle, to provide some international context to Canadian price trends. It also compares a number of other international house price metrics, which taken together may provide a measure of price risk.

Home price appreciation in both the United States and Canada has actually been relatively modest by international standards, totaling a cumulative 50 per cent and 61 per cent respectively.

While real prices have declined in Japan and Germany, the 10-year cumulative price run-up was considerably larger in Ireland, the U.K., Spain, France and Australia, all of which have experienced increases upward of or exceeding 100 per cent. While available data for 2008 varies, real price growth appears to have decelerated sharply or turned negative in all 10 countries considered, including Canada.

The report cautions that real price trends are not a particularly useful guide to future price movements, at least over the short-term. The driving forces behind the price appreciation as well as current supply and credit conditions are more important.

Record unsold housing inventories, mounting foreclosures, overbuilding and credit constraints are bigger factors behind the continuing and steep slide in U.S. home prices than overvaluation, none of which are major concerns in Canada.

“There is further downside risk to home prices in Canada, especially in light of reduced growth and employment prospects,” said Ms. Warren. “We expect, however, that the correction in national average prices from their late-2007 peak will probably be in the range of 10 per cent-to-15 per cent, well below the ongoing U.S. retrenchment.”

“Much of this realignment will occur in Canada’s three Western-most 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.”

– RCD Digital Media

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