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
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.”