Average home prices in Canada will likely contract 10 to 15 per cent over the next two years, says a report released by TD Economics.
The report said that while new lending rules announced recently are not intended to severely impede household spending and housing demand, their impact will be substantial.
“In particular, the previous rule changes had a significant impact on home sales, particularly in the six months following implementation. The policy changes, combined with modestly higher interest rates and a gradual deterioration in affordability, are expected to trigger a welcomed unwinding of excesses in the Canadian housing market,” said the report.
“In our view, average home prices will likely contract 10-15 per cent over the next two years, with markets that are generally viewed as more overvalued, such as Toronto and Vancouver, experiencing the largest adjustments. The anticipated housing slowdown will feed into real economic activity through a number of channels. First, as home prices stop increasing, households will become more reluctant to go out and spend. Second, fewer home sales will reduce consumer purchases of housing-related goods and services, such as renovation supplies and furniture and equipment.”
Overall, housing-related consumer purchases account for just under 10 per cent of overall personal consumption expenditure, it said.
“In addition, the blend of softer sales and rising inventories of unsold new homes is likely to bring down the pace of homebuilding activity starting in the second half of this year, with residential construction expected to detract from growth in 2013.”
Just last week, federal Finance Minister Jim Flaherty announced he was changing mortgage rules to make it harder for people with limited means to buy homes or borrow on ones they already have. The changes to Canada Mortgage and Housing Corp. rules announced by Flaherty will cut the maximum term of insured mortgages to 25 years from the current 30 years and will end insurance for homes which cost more than $1 million. The changes will also limit refinancing loans to 80 per cent of the value of a home, from the current 85 per cent.
For the first time in 11 months, none of the 11 Canadian metropolitan markets surveyed showed a monthly price decline. Nationally, prices reached an historical high in May, up 1.1 per cent from the previous month and by 5.8 per cent compared with last year.
TD Economics, in its report, said the Canadian economy is transitioning into a period of softer economic growth of around two per cent, as it tackles domestic imbalances of excessive personal debt and government deficits.
“The No. 1 risk to the outlook is the ongoing European fiscal crisis,” said Craig Alexander, senior vice-president and chief economist for TD Economics. “A second risk is the slowdown in emerging markets, particularly China, which is depressing commodity prices. A third risk is the question of whether the U.S. government can avoid the fiscal cliff of expiring stimulus programs, expiring tax cuts and planned program cuts that threaten to derail the recovery in early 2013.”
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Source, Image: Calgary Herald, Design.Shuffle