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Canada’s housing boom has come to an end - 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. 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 US price declines, the report said.

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 US 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 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 US 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 UK and Australia."