So, how will home prices be impacted?
“We estimate that at their peak in the first half of the year, average home prices will be roughly 15% overvalued when benchmarking against long-term economic fundamentals, such as income growth. If our forecast unfolds, roughly a third of this excess would be unwound by the end of 2011, leaving our estimate of valuation at roughly 10% above fundamentals, back to what it was in late 2007. As in our last forecast, we still expect the bulk of the readjustment to occur over a medium-term time frame of 2-3 years whereby average home prices rise roughly at the rate of inflation-after having climbed by over 8% annually over the last 8 years. Meanwhile, household incomes will be allowed to catch up and close the gap, which is concentrated in the country’s most expensive markets (e.g. Toronto, Vancouver).”
The bottom line?
TD expects to see the average price of a home in Canada to reach $349,000 in 2010 and moderate to $339,700 through 2011 when unit sales are expected to post a 10-12% decline. They expect prices to drop in seven of ten Canadian provinces and predict that the Prairie Provinces will post “meager” gains over the same period. TD says the average price of a home in Saskatchewan will finish 2010 at $242,000 and rise to $245,000 through 2011.
While TD is predicting national price declines that are nearly twice those called for by the Canadian Real Estate Association (CREA), their predictions paint an optimistic picture given the amount of bubble talk we’ve heard over the past couple of months. TD economists believe that a quicker and stronger than expected economic recovery, and credit markets which will remain favourable by historical standards, will keep Canadian housing from the crash that some are predicting.
There does seem to be a couple of points of consensus amongst those who regularly comment on the nation’s real estate market. Demand is going to drop and home prices are likely to follow.
Phil Soper, chief executive officer for Brookfield Real Estate Services, owner of Royal LePage and le Capitale is quoted in a Globe and Mail story today. “It’s likely too conservative, but they (CREA) have the direction right,” he said. “Affordability is eroding in Canada, and higher prices and more expensive mortgages will push people out of the market quite quickly.”
Read TD’s report here.
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