TORONTO, Aug. 8, 2012 /CNW/ - The downside risks to Canada's housing market are increasing, according to a Special Report on Canadian Housing released today by Scotiabank.

"Canada's housing market is expected to avoid the sharp downturn witnessed in the United States and Europe," said Adrienne Warren, Senior Economist at Scotiabank. "However, the downside risks to domestic housing activity are increasing. The full impact of the slowdown may not become fully visible until mid-decade."

According to the report, record prices combined with incremental regulatory tightening are reducing affordability and the housing market's earlier momentum, notwithstanding the lowest borrowing costs on record. Pent-up demand has been effectively exhausted after a decade-long housing boom, with Canadian home ownership at record levels. The global outlook also has become much more challenging.

"Average Canadian home prices will eventually decline a cumulative 10 per cent over the next 2-3 years, as housing demand softens and buyers' market conditions re-emerge for the first time in over a decade," said Ms. Warren. "The correction will be concentrated in the Toronto and Vancouver markets, where supply risks and affordability pressures have the potential to trigger larger price adjustments."

Canadian household balance sheets remain in reasonably good shape, with homeowners' equity in real estate assets averaging 67 per cent compared with 41 per cent in the United States. Nonetheless, high personal debt loads and balance sheets heavily skewed to real estate leave Canadians vulnerable to an adverse shock, including a sharp rise in unemployment and/or a sharp drop in home prices.

"The multi-year rise in home prices in Canada has pushed housing valuations to record levels, whether measured by the ratio of national house prices to household disposable income or by a house price-to-rent ratio," noted Ms. Warren. "Both measures may be in the process of plateauing, but are unlikely to decline until house prices and unit sales move decisively lower."

The report also notes that certain market segments are at risk of oversupply, including the expanding condominium markets in several of Canada's largest centres, notably Toronto and Vancouver. Current high-rise projects are being supported by strong demand. However, the ongoing high level of condominium construction underway combined with an elevated level of unsold units in the pipeline raises the risk of a sharper price correction to any weakening in demand.

Scotiabank 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.

SOURCE: Scotiabank