Depending on who you ask, you will discover varying viewpoints on when and how the Canadian real estate market will calm down from its latest meteoric climb. According to the story released this month in the “Globe and Mail," TD Bank bluntly predicts that by the second portion of 2011, real estate values will fall 2.9 percent, but not until they experience a 9 percent climb in market price over 2009 prices. But economist Sal Guatieri of BMO Capital Markets is somewhat optimistic, informing "The Montreal Gazette" that the overvaluation that resulted in the real estate bubble will just affect big cities, and should not bring about the kind of nationwide meltdown anticipated in the US market. One thing they both appear to agree on, however, is that the Canadian housing sector is on course for a cooling trend -- the question is simply how much and how soon.
Guatieri pointed out that the price for a family residence should be “about four or five times income," however today’s market in Toronto and Vancouver is running around $700,000, which averages 10 times the earnings of the home owner. This kind of hyper-inflation is what prompted TD Bank to not associate economic recovery with housing value, because their previous projection of 1.6 percent gains in 2011 are already being compromised by the rise in the amount of new listings and new housing starts this year, a strong sign of the beginning of the cooling trend. places such as Mississauga are currently seeing an increase in new Mississauga condominiums but sales might start to decline.
In their discussion with "The Vancouver Sun," TD conceded that their forecasts have been off in the past, because their late 2009 forecast did not expect the increase in first quarter sales for that year that was an unpredicted "move by buyers and sellers to pre-empt regulatory and interest-rate changes”. This surge, mainly in Ontario and British Columbia, stems from the July target date in those provinces for the harmonized sales taxes to come into effect. In anticipation of this July deadline, the Bank of Canada has already announced its intention to lift their overnight target rate by July to counterbalance the current record setting low rate of 0.25 percent. Higher lending costs could act on cottage country with deduced prices for areas such as Wasaga Beach real estate and this could represent a chance for purchasers.
TD is of the opinion that real estate prices are rather overvalued and that prices will continue in a downhill shift well into the next year as a result of family incomes that are trying to catch up to the inflation rate. This is bolstered by a drop in MLS sales, that also includes Toronto MLS listings, over the previous 6 months that the Canadian Real Estate Association has noticed. The sole question that is on the table is what affect the lofty values will have on the housing sector as a whole in the short term and going forward.
Gauthier explains his projections are a result of the “stronger supply response,” and that the “market balance is now expected to be somewhat softer next year, consistent with market conditions more favorable to potential buyers and a mild depreciation in home values”. But Guatieri thinks the approaching cool down period does not automatically signify that home prices will indeed drop, however sees it as a gentle change following the recent surge. Gauthier and Guatieri both see indicators, however, that whenever it arrives, the cooling shift will be short lived, and that the average residential price should naturally come back to normal market value within the next 3 years.
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