TD: Housing Correction Appears To Be Under Way

In TD’s Quarterly Economic Forecast released today, the bank takes a look at real estate in Canada:

For some time now, TD Economics has been warning that the Canadian housing market was overpriced and overbuilt, setting the stage for a gradual correction to take place over the medium term. The tide seems to have finally turned. The combination of market fatigue, stricter lending guidelines for insured mortgages and a deterioration in housing affordability is helping to put the brakes on housing activity.

Nowhere is this more evident than in Vancouver’s market, where year-over-year home sales and prices were down 31% and 7%, respectively, in August 2012. While other major markets have held up considerably better so far this year, we expect the slowdown will become more broad based following a fourth round of mortgage insurance regulation tightening by the federal government
in July.

Among a string of changes, the government reduced the maximum amortization period from 30 years to 25 years. As we discuss in a recent TD Economics report “Tighter Mortgage Rules to Cool Debt Growth, But Higher Rates Ultimately Required”, these changes, combined with additional tightening moves by the bank regulator, OSFI, are likely to put a damper on sales and prices over the next few quarters.

That said, with interest rates likely to remain unusually low until 2013 and even into 2014, there are limits to how much of the current over-valuation in the market – which we estimate at 10% – will be unwound in the near term. Rather, the adjustment is expected to occur gradually over the next 2-3 years, which should be quite manageable for most Canadian households. Faced with rising inventories of condominium units and some softening of sales, new home construction could be headed for a more pronounced slowdown over the next 12-18 months.

In Calgary, a different tale is unfolding thus far.

Ann-Marie Lurie, CREB’s chief economist, in an interview with the Calgary Herald said the city’s housing market has been buoyed by positive economic markers such as employment growth, economic growth and positive migration. Consumer confidence has also contributed to positive sales growth in real estate.

But Calgary’s housing market was slow to recover from the recession, has recently been picking up steam and it still has a way to go to catch up to the peak pricing of a few years ago, she said.

“Even though there’s growth, we’re not at typical levels of activity,” added Lurie. “We’re just returning there.”

4 responses to “TD: Housing Correction Appears To Be Under Way

  1. What are your thoughts about the leaky and faulty condos beginning to come to light, Mike? Personally, I wouldn’t touch a condo (or even SFH) built in the boom times….thinking that might have an impact on the resale market at some point.

  2. The thing with some of these leaky condos now in the media is that they were built before the boom years.

    For example, Bella Vista construction began in 2001. Edgecliffe Estates was built in 1990.

    That’s not to say there weren’t shoddy condo conversions and poor workmanship during the boom but it’s not limited to that time.

    Always review the condo docs for minutes of the meetings, speak to owners, research the builder, and get a home inspection.

  3. A little further to the TD report in the main post.

    TD Economics has gradually reduced its estimate of the overvaluation in Canada’s house prices, as the growth in people’s disposable income picks up while the market stagnates.

    The quarterly economic forecast that the bank released Tuesday pegs the current overvaluation in the market at 10 per cent. It had previously estimated that prices were 15 per cent too high, and then suggested a range of 10 to 15 per cent.

    Read the entire article in Globe and Mail

  4. Scotiabank has admitted there is a housing bubble in Canada but that the housing market is “at worst” destined for a soft landing.

    Read the entire article in the Globe & Mail

Please feel free to post your comment or question

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s