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Greater risk in Canadian housing markets remaining hot than cooling down: TD

TD Bank Financial Group released a “Resale Housing Outlook” yesterday that provides some insights into the potential consequences of the quick recovery that the Canadian housing market experienced over the past year. It’s a pretty interesting, “where we’ve been, where we may be headed” report. Some of the ideas that caught my attention from the report are outlined below. The full five-page report can be found here.


While in the thick of a recession, the strongest countervailing force that set the stage for the mother of all rebounds, apart from lower prices, was lower interest rates.


All said, the housing market has gone beyond retracing its steps and fully recovering from the end of 2007 – which had marked the peak of a half-decade long boom, concentrated in Western Canada…As of October, both sales and the average price stood 5% higher than their respective 2007 peak…But now that home values are already past their previous peak in such short order, we estimate that the typical home remains overvalued by 12% at the national level. Unfortunately, sheer momentum suggests that this overvaluation is likely to increase over the course of the next few quarters, peaking at 13-15% in H1/2010.


The misalignment of home prices with their fundamental drivers, such as demographics and income, cannot last. That much is known…Because a necessary realignment has been erased so quickly without support from income growth, another adjustment must take place – although it could take many forms. As of our writing this note, early signs of market cooling are emerging and our analysis still suggests the most likely outcome is a soft landing and relative stagnation of home values in real-terms along with a resumption of stronger income growth over the 2011-13 time frame.


As the central bank begins to hint at a tightening monetary policy cycle in the second half of next year, sales could well see a last gasp of strength. Moreover, by that time, the availability of units on the supply side should provide a relief valve helping to cool price growth. And, by 2011, while the overall economy will have improved significantly, housing markets will be losing momentum.


While current price levels are above what we estimate to be long run fundamental values, they do not appear so dramatically out of line as to warrant a sharp correction in the near-term…As for price momentum, it is more clearly unsustainable…Recall that every price increase that is not matched by a commensurate income gain increases the overvaluation gap. Second, more supply should come online in the first half of 2010 in the form of new home and condo completions.


The current market tightness, as measured by the sales-to-listings ratio (limited inventory), while expected to ease gradually over the course of 2010, will not turn on a dime. As a consequence, it will be supportive of price growth in 2010 that is stronger than fundamentals can support over the long haul. After climbing by an estimated 4-5% on an annual basis this year, the average existing home price is expected to gain another 9-10% in 2010 as sales climb to 475K.


In closing, we note that the most important downside risk to our near-term forecast is not that the market cools more than we anticipate. While this risk certainly exists, it would not cause significant market disruptions, and it would ensure that affordability does not continue to erode at the current pace. The risk is rather that the market remains as hot as it currently is for too long, eventually running head-on into monetary policy tightening (and longer term bond yields rising). There is more than adequate time for the housing market to cool before then, but history suggests that if it fails to do so, the ensuing adjustment would be a rude awakening.


Thanks to Larry Yatkowsky of Vancouver’s Yatter Matters for the heads up on this report. See Larry’s overview, “Green Chair Talks.


I’m always happy to answer your Saskatoon real estate questions.  All of my contact info is here. Please feel free to call or email.


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Norm Fisher
Royal LePage Vidorra

Norm Fisher, Author of the TeamFisher Saskatoon Real Estate Blog

About Norm

Licensed in 1993, Norm brings a wealth of experience to TeamFisher. He has worked in every imaginable capacity including sales agent, office manager, team leader, broker and now, broker/owner. Norm has written a weekly review of the Saskatoon real estate market for more than 650 consecutive weeks which may make him the most consistent industry blogger in the world.Less...

Licensed in 1993, Norm brings a wealth of experience to TeamFisher. He has worked in every imaginable capacity including sales agent, office manager, team leader, broker and now, broker/owner. Norm has written a weekly review of the Saskatoon real estate market for more than 650 consecutive weeks which may make him the most consistent industry blogger in the world.

Norm is known for his passion for technology and can most often be found exploring and experimenting with the next big thing in real estate marketing. He was the first Saskatoon real estate agent to promote a home online and has been an early adopter of new technologies ever since. “Everything about this business has changed over the past 20 years, and it will happen again in the next ten. An open mind and a curious attitude are all that’s needed to continue to find new ways to serve our clients by delivering a faster, smoother, worry-free transaction,” says Norm.

In his spare time, Norm enjoys Crossfit and cycling, some years accumulating over 2,000 kilometres on the road. He’s a strong supporter of the Royal LePage Shelter Foundation and enjoys raising funds by joining fun, fitness-related initiatives like the Grouse Grind for Shelter. In 2015, he trekked the Peruvian Andes to Machu Picchu. In 2017 he walked the southern highlands of Iceland across mountains, sand, snow, ice, lava fields and forest for seven days. Collectively those initiatives raised over a million dollars for Canadian women's shelters.
 

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