TORONTO, Sept. 13 /CNW/ - Continuing tight supply-demand conditions have
lifted real housing valuations in Canada above their long-term trend, raising
the risk of an eventual softening in prices, according to the latest Real
Estate Trends, released today by Scotia Economics.
    "The fundamentals underpinning Canada's housing market are still quite
good," said Adrienne Warren, Senior Economist, Scotia Economics. "Unemployment
is low, immigration is high and apartment vacancy rates are tight. There is
little evidence of overbuilding or speculative buying. The industry also has
relatively little direct exposure to subprime lending, with these loans
accounting for only about five per cent of domestic mortgages in recent years
compared with about 20 per cent in the United States.
    "Yet, there is little doubt that current trends are unsustainable," added
Ms. Warren. "Affordability is becoming increasingly stretched for many would
be buyers after almost a decade of rising home prices. More recently, economic
risks have increased in the wake of the intensifying financial market turmoil
stemming from the U.S. subprime mortgage problems."
    Moreover, from a long-term perspective, there is growing evidence of
overvaluation in home prices in some parts of the country, a precursor to a
period of softening conditions. In all 15 cities examined in the report with
the exception of St. John's, current inflation-adjusted price levels are above
their long-term trend. The national average deviation at mid-year was roughly
eight per cent, however, there are big regional variations, ranging from just
one per cent in Ottawa to 25 per cent in Edmonton.
    "Some deviation from underlying trends is to be expected at the late
stage of a housing boom," said Ms. Warren. "At the peak of the prior two
housing cycles in 1976 and 1989, national home prices were 12 per cent and 18
per cent, respectively, above their long-term trend. The smaller degree of
overshooting this time around, and the sustainability of price appreciation,
may reflect in part an undervaluation of Canadian real estate prices in the
late 1990s and into the early part of this decade."
    Canada also ranks relatively low in the degree of house price
overvaluation relative to other major developed nations. The economist
estimates that average real home prices in the United States carried a
near-record 14 per cent premium in 2005. U.S. average valuations have since
slipped below trend amid a large and growing supply overhang and weakening
demand.
    Despite the deviation in the level of Canadian home prices from long-term
trends, price growth remains consistent with short-term supply-demand
dynamics. Most major markets in Canada are still categorized as sellers'
territory in which prices would be expected to rise faster than inflation. By
and large, those cities enjoying the biggest price increases are also facing
the tightest supply-demand conditions, including Regina and Saskatoon.
    "The further domestic home prices climb above underlying economic
fundamentals, the greater the risk of an eventual correction," said Ms.Warren.
"The 1976 and 1989 housing peaks were both followed by some adjustment in real
prices. In the past, this adjustment has normally occurred though a period of
inflation erosion as opposed to nominal price declines."

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.