Stable property prices in Canada may soon be adjusted
Residential property prices in Canada are fairly stable but could fall by 10% in the next two years as real estate is overvalued and higher mortgage rates are expected, it is claimed.
Prices are at all time highs, but the number of homeowners looking to sell has created a glut of inventory and anticipated higher mortgage rates and stricter qualification rules threaten to price more people out of the market, ultimately driving prices lower as fewer buyers compete for what’s available, according to analysts.
Prices could fall by up to 10%, according to CIBC World Markets economist Benjamin Tal but he ruled out any kind of dramatic correction. ‘We are more likely to see higher interest rates causing a modest decline in prices. Because we lack the driver for a more violent decline, we should expect a more orderly rebalancing,’ he explained.
He believes the major problem is that prices are higher than they should be with 17% of Canadian homes trading above their fair value. Modifying a formula created by the International Monetary Fund, he said prices are higher than they should be as justified by housing market fundamentals such as income, rent or demographic changes.
His research shows that 20% of homes are considered overvalued in British Columbia, 17% in Alberta, 13% in Manitoba and Saskatchewan, 13% in Quebec, 11% in Ontario and 8.6% in Atlantic Canada.
According to the latest figures from the Royal Bank of Canada the cost of home ownership rose for the third straight quarter across all housing segments in the first quarter of the year and are now moderately above their long term averages, but below the peak in early 2008.
Experts at TD Bank have suggested that prices could fall by 2.7% in 2011 and the Canadian Real Estate Association expects to see a decline of 1.5%. The property market is widely regarded as being at, or very near, the top of its cycle and experts expect it to be stable for some time, it says.
‘The relationship between average price and income has recently been cited as portending a US style correction in Canadian home prices. However, such warnings ignore the longer term relationship between prices and income and disregard typical Canadian housing market cycle dynamics,’ said Gregory Klump, Chief Economist at CREA.
‘The Canadian housing market is now widely thought to be at, or very near, the top of a cycle and the ratio of home prices to incomes is currently high. This ratio will revert to its long term average as it always does as part of a normal housing market cycle. History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again,’ explained Klump.