Inflated Real Estate Values In Canada Should Begin To Come Down
The issue of when and how the Canadian real estate sector will cool down seems to rely on whom you ask. According to the story issued this month in the “Globe and Mail,” TD Bank frankly predicts that by the later portion of 2011, real estate prices will drop 2.9 percent, but not until they undergo a 9 percent increase in value 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 only affect large cities, and should not cause the sort of nationwide collapse anticipated in the US sector. But they all concede that the Canadian housing market will need to cool down, but just how soon it will happen and how quickly it will drop is the dispute still up for review.
Guatieri indicated that the price for a family home should be “about four or five times income,” however the current market in Toronto and Vancouver is closing in around $700,000, which averages 10 times the income of the home owner. This kind of hyper-inflation is what prompted TD Bank to not associate recession recovery with real estate value, because their previous estimate of 1.6 percent gains in 2011 are already being undermined by the rise in the amount of new listings and new real estate starts this year, a strong sign of the beginning of the cooling trend. Areas like Mississauga are still seeing an escalation in new Mississauga condominiums but sales might begin to decline.
In their interview with “The Vancouver Sun,” TD admitted 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”. The looming harmonized sales tax scheduled to come online in July in Ontario and British Columbia definitely impacted markets in those provinces. In anticipation of this July time limit, the Bank of Canada has already declared its plans to raise their overnight target rate by July to counterbalance the recent record breaking low rate of 0.25 percent. More expensive borrowing rates should affect cottage country with deduced prices for places like Wasaga Beach real estate and this might represent an opportunity for purchasers.
TD is of the opinion that housing values are somewhat overvalued and that prices will proceed in a downward shift well into the next year as a result of household incomes that are trying to chase after the inflation rate. The Canadian Real Estate Association concurs that they are witnessing MLS sales fade over the last 6 months, and anticipate this decent to carry on and even Toronto MLS listings are showing signs of a drop. However everyone can see indicators that the entire housing market has been acted on by the high percentage of inflated values in the cities — how far this influence will spread is the main question.
Gauthier describes his projections are a consequence 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”. However Guatieri believes the approaching cool down phase does not necessarily mean that home values will actually drop, but predicts it as a gentle adjustment following the recent surge. Gauthier and Guatieri both see indicators, however, that no matter when it arrives, the slowing trend will be short lived, and that the average home price should naturally come back to fair market value within the next 3 years.
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