TORONTO, May 15 /CNW/ - After many false calls, there is now convincing
evidence that Canada's housing market has come off the boil, according to the
latest Real Estate Trends released today by Scotia Economics. Home resales,
having fallen for four consecutive months, are running about 15 per cent below
last summer's historic peak. Average annual home price appreciation has eased
back into the mid single digits, as overall market conditions come into better
balance. Adjusted for inflation, the average resale home price in Canada
registered its first quarterly decline in seven years in the first quarter of
2008.
    According to the report, cracks are appearing on the new home front as
well. While housing starts in early 2008 are essentially tracking last year's
elevated levels, demand for new residential building permits has fallen
sharply. Price increases for new homes are moderating, while inventories of
unsold new homes are trending higher.
    "We expect overall sales volumes in 2008 to total about 15 per cent below
last year's record levels, and home prices to increase on average by about
five per cent," said Adrienne Warren, Senior Economist, Scotia Economics.
"Price gains should slow further in 2009 with the return of a balanced market
for the first time in a decade. Meanwhile, housing starts are projected to
gradually moderate, returning toward underlying annual household formation
levels of around 180,000 by the end of the decade, from the current 225,000
unit range."
    The report also states that the cooling in overall activity is most
notable in many of Canada's hottest urban housing markets in recent years,
including Calgary and Edmonton. Both centres have officially moved into
buyers' territory as soaring prices weaken demand and fuel new listings. More
generally, however, economic conditions continue to favour the resource-rich
markets in the West over manufacturing-dominated centres in Central Canada.
Regina and Saskatoon are currently in the strongest sellers' position
nationally, supported by good affordability, rising population inflows and
tight supply.

    Risk of a major correction still low

    According to the report, Canada's recent record of home price
appreciation, averaging an annualized 10 per cent from 2002 to 2007, was
unsustainable, and a return to more historical norms is a welcome development.
The faster and longer home prices climb, the greater the risk of an eventual
price correction. Canada's last two major housing booms of the 1970s and 1980s
were both followed by some degree of real price stagnation or decline, an
essential ingredient to restoring affordability and generating renewed pent-up
housing demand.
    Ms. Warren cites a number of reasons why a major correction is not in the
cards, "Home prices in Canada are not substantially overvalued. Our long-term
housing price model puts average home prices in 2007 at about eight per cent
above their long-term trend, compared with a premium of 12 per cent and 18 per
cent, respectively, at the 1976 and 1989 housing cycle peaks. Recent
International Monetary Fund (IMF) estimates placed Canada at the bottom rungs
of international home price overvaluation."
    Canada's real estate market is not overbuilt. While inventories of unsold
homes are trending higher, the number of unabsorbed units, including
condominiums, remains well below prior cyclical peaks in most major centres.
Tighter lending guidelines and high construction costs have likely contributed
to a more cautious approach among builders.
    Households, for their part, are not overleveraged. Home equity as a share
of real estate assets is near record highs, with price appreciation outpacing
the rise in mortgage obligations. Mortgage carrying costs as a share of
disposable incomes are historically low despite rising home prices.
    Overall mortgage quality is still sound. Canadian lenders have maintained
conservative loan qualifying criteria in recent years even while introducing a
range of new products, including interest-only mortgages, no downpayment
mortgages, and extended amortization of up to 40 years. Canada does not have
ultra-low teaser rate mortgages that have contributed heavily to U.S. defaults
as they reset. Adjustable-rate mortgages, sub-prime lending, borrowing against
home equity, and insured investor mortgages all account for a much smaller
share of the Canadian mortgage market than in the United States.
    "At the end of the day, we predict a soft landing for the Canadian
housing market, with somewhat lower sales and construction, and a period of
relatively flat inflation-adjusted home prices," added Ms. Warren. "While
underlying domestic housing fundamentals remain healthy, a major risk to the
outlook would be a deeper and more protracted downturn in the U.S. economy,
with more serious repercussions for domestic output, employment and income
growth."

    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.