Housing Predictions For Next Year Are Varied
Economists were polishing their crystal balls this week and trying to peer into the future to see what next year’s real estate market will be like, with predictions varying widely.
Most market observers are still talking about a recent report in one influential international publication that suggested Canada’s residential real estate market is overvalued by almost 24 per cent and should be watched very cautiously in the coming year.
The Economist magazine recently released its annual report on global housing prices, comparing twenty countries selected from around the world. Canada had one of the highest appreciation rates, but still seemed modest compared with Australia at 63.2 per cent and Spain at 47.6 per cent.
But one of the big five major Canadian banks almost immediately fired back a response to The Economist article this week, disputing the methodology and suggesting the number closer to 11 per cent. Predictions from other economists have also been appearing faster than Christmas decorations going up in stores the day after Halloween.
“All things considered, the Canadian housing market does not appear to be in a bubble, and is unlikely to suffer a U.S.-style collapse,” BMO economists Earl Sweet and Sal Guatieri said in a report.
“The media and some analysts remain glued to the idea that the Canadian housing market is a bubble ready to implode a la the U.S., Ireland, Britain and Spain, where prices have dropped 22 per cent on average,” the economists explained. “A comparison of the ratio of prices to incomes with the long-term trend suggests Canadian house prices were overvalued by as much as 18 per cent in late 2009. However, a 3 per cent decline in seasonally-adjusted prices so far this year, coupled with continued moderate income growth, has reduced overvaluation to a less worrisome 11 per cent in the third quarter of 2010.”
Martin Nel, BMO Bank of Montreal’s vice president of lending and deposit products, pointed to mortgage rates currently at “record lows”, making Canadian housing still affordable for the average consumer.
“Even with the notable rise in house prices during the past few years, the costs to service an average priced home, including principle and interest, are running close to long-term norms.”
Nel added that with this in mind, Canadians still need to do their homework before making any big decisions.
“Regardless of the market conditions, we advise prospective home buyers to stress test their financial budget using a mortgage payment based on a higher interest rate than what is currently available,” said Nel.
The report does take note of regional differences, with B.C.’s housing market shown to be more overvalued than Ontario’s or Alberta’s. “Unlike these two other provinces, B.C. house prices have continued to trend higher in 2010, reaching new peaks in September,” the report said. “Consequently, it likely faces a greater downside risk than other provinces. Valuations in Alberta and Ontario are closer to the current national estimate.”
The Economist also used price to rent rations to calculate their numbers, compared with the price to net income formula used by most economists in North America.
In Toronto earlier this week, at least some real estate analysts and economists were still scratching their heads at the magazine article’s findings.
“I’m still not sure why they would look at price to rent. It’s not an accurate way of doing this,” Jason Mercer, senior market analyst with the Toronto Real Estate Board.
“There is no common industry method of calculating projections and what the market will do at any given time. That’s been quite evident over the past few months with people changing their opinions,” he said.
“For example, one of the things I look at is price compared with the broad affordability index. What are housing costs as a percentage of income?”
Mercer said in calculating housing costs, all the different expenses need to be added together, like mortgage principal, interest, property taxes and utilities. Every household is different on what percentage of their income is dedicated to housing, he explained, but most lenders try to look for no higher than one third, or 33 per cent.
Canada’s largest real estate board reported 3,076 properties were sold through its multiple listing service during the first two weeks of this month. That represents a 16 per cent decrease over the 3,666 units sold during the same time period last year.
So far this year, 78,526 properties have been sold in the Greater Toronto Area, up slightly from the same time period last year.
So what will the market be like in the coming year?
“There hasn’t been a lot of upward movement in terms of borrowing costs so I’m predicting you will see a moderate price increase in the Toronto market of about three per cent. Housing prices still remain affordable and borrowing costs are stable so everything should be somewhat balanced,” Mercer said.
Meanwhile, officials at the Canadian Real Estate Association changed their annual forecast for the coming year, announcing record low interest rates have combined with low inventory to spark increasing demand for Canadian real estate.
CREA said this week that despite prices being flat in October and sales were down more than 20 per cent compared with a year earlier, the market posted its third straight month of increased sales.
They reported October sales were halfway between the lows of December, 2008, and the record high of December, 2009, which could be interpreted as a sign the market is stabilizing.
“It seems to me the Canadian housing market has been either feast or famine,” said BMO Nesbitt Burns economist Douglas Porter told the Globe and Mail. “But now buyers are facing low rates on one hand, and daily volleys about how bad the market is on the other. That should keep things from getting overly hot, and gives me reason to believe we could have a balanced market in the year ahead.”
After slowing in the recession of 2008, sales activity reached a fevered peak in December, 2009, as buyers rushed back into the market.
Average resale prices were at an all-time high $346,881 last May, causing concern that cheap money was driving prices to unsustainable levels. The average resale price in October was $337,842.
But the market came to an abrupt halt last July, with major regions such as Vancouver and Calgary posting sales drops of nearly 45 per cent and prices pulling back from May’s high. Several factors were cited for the decline: The federal government introduced rules that made it more difficult to qualify for a mortgage, and Ontario and Quebec introduced harmonized sales taxes that made the services associated with buying a home more expensive.
Would-be buyers also faced a barrage of warnings from organizations such as the Bank of Canada, the OECD and International Monetary Fund, all of which have cautioned that as interest rates rise, many Canadians might not be able to make their mortgage payments.
One of the first economists to predict the U.S. mortgage crisis also warned this week that Canada’s housing sector could be headed for a sharp correction, CBC News reports.
Dean Baker of the Washington-based Centre for Economic and Policy Research said he sees no reason why average home prices in Canada should be about 50 per cent higher than in the U.S.
Baker said if interest rates rise by two per cent, Canadians could see house prices collapse by 25 to 30 per cent.
Given the potential damage, Baker said the federal government should consider regulations to further tighten mortgage lending and the Bank of Canada should consider raising rates.
Ottawa moved last February to tighten lending requirements and late last month, the Bank of Canada left its key interest rate unchanged at one per cent after three consecutive quarter-percentage-point increases, saying that the Canadian outlook had changed and that it expected full recovery to take a year longer than it had earlier predicted.
Baker was recently given the Revere Award along with two others for being the first to sound the alarm on the U.S. housing bubble five years before it burst.
But domestic mortgage rates have actually dropped in the past three months and now sit at all-time lows. A recent survey done by the Canadian Association of Mortgage Professionals released showed that Canadians are confident they could shoulder higher mortgage payments without too much difficulty, with 84 per cent saying a $300 monthly increase was no problem.
And that still didn’t stop two major banks – TD Canada Trust and Royal Bank of Canada, from announcing this week that they were increasing some of their fixed term mortgage rates by as much as one quarter of a percentage point.
Popular five year mortgages rose by 0.25 of a percentage point to 5.44 per cent. Rates on three and four year mortgages also increased by a quarter of a percentage point and one and two year rates went up by 0.15 of a point.
Rates for mortgages that have six, seven and ten year terms were unchanged.
Five year mortgage rates in particular are closely tied to yields, or rates of return in the bond market, which have recently rebounded following three straight months of declines. That means Canadian banks were paying a higher borrowing rate in the bond market in order to lend to prospective homeowners.
CREA now predicts national sales activity is expected to reach 442,200 units by the end of this year, representing an annual decline of 4.9 per cent. While monthly levels for sales activity are stabilizing, year-over-year comparisons are likely to remain stretched well into 2011 due to the record-level activity reported in late 2009 and early 2010.
Lackluster economic and job growth, muted consumer confidence, all predicted by CREA officials during 2011, means national home sales activity is forecast to decline by nine per cent to 402,500 units in the coming year.
“Interest rates are expected to resume their return to more normal levels next year, but will still be at levels that are friendly to the housing market,” said CREA president Georges Pahud. “For the tenth year in a row, more than 400,000 homes are expected to change hands over the MLS systems of Canadian real estate boards and associations next year.”
Levels for sales activity and new listings have swung widely across the country until recent months, according to a CREA press release. It added despite their volatility, movements in sales activity and new listings have remained in synch and have kept the resale housing market balanced since early 2010. The overall supply of homes for sale has also been trending lower in recent months. The resale housing market has remained balanced on a national basis and in most provinces, resulting in stable average price trends.
CREA officials predict the national average home price is forecast to rise 3.1 per cent in 2010 to $330,200, with increases in all provinces. The small revision to CREA’s average price forecast reflects changes to the forecast for provincial sales activity and corresponding provincial contributions to the national average price calculation. The balance between supply and demand is forecast to remain stable, resulting in stable price trends.
Modest average price gains are also forecast in 2011 in all provinces except British Columbia, Alberta, and Ontario. Lower sales activity in British Columbia and Ontario are expected to result in a 1.3 per cent decline in the national average price to $326,000.
“Housing demand and supply is stabilizing,” said Gregory Klump, CREA’s chief economist. “That’s good news for home buyers, who will feel less hurried to make an offer than they did when transitory factors ignited housing demand in early 2010. It’s also good news for home sellers, who will feel more confident about price stability now that the housing market has become balanced.”
“Interest rates are widely expected to remain low for some time due to recent downward revisions by the Bank of Canada to its outlooks for economic growth and inflation. Consumer sentiment will likely remain under pressure until economic prospects improve meaningfully,” said Klump.
“In the meantime, many households will be focused on paying down their debts before the Bank of Canada resumes hiking interest rates next year,” Klump added. “Economic uncertainty is likely to keep potential homebuyers in a cautious mood, so the continuation of low and stable interest rates is unlikely to cause housing demand or prices to swell.”
Back in Toronto, economists were still looking trying to look at the numbers and predict what next year will be like. With the number of houses listed for sale sharply lower than in July, prices are expected to stay firm as buyers compete the few homes available. The months of inventory – the amount of time it would take to sell everything that is for sale, at the current rate of sales – sat at 6.2 months in October, down a full month compared with the July figure.
That doesn’t mean prices are likely to catch fire again in the spring, when activity traditionally accelerates, but it should help keep prices from dropping as buyers and sellers hit the market in what should be equal numbers.
“All the talk of a U.S. style housing bubble is completely unrealistic,” Ted Tsiakopoulos, Ontario regional economist for the Canada Mortgage and Housing Corporation, said in an interview.
“Next year you should have continued strong mortgage rates and other factors, but you will still see a slight decrease. We’re predicting that will be almost half a point in the Toronto market, or .4 per cent,” he said.
In Ottawa, CMHC released their annual fourth quarter housing market outlook that showed housing starts should “stabilize at levels consistent with demographic fundamentals in 2011”.
The federal agency predicted housing starts would be in the range of 176,700 to 194,700 units in 2010, with a point forecast of 186,200 units. In 2011, housing starts will be in the range of 148,000 to 202,300 units, with a point forecast of 174,800 units.
“High employment levels and low mortgage rates will continue to support demand for new homes in 2011. Nevertheless, housing starts will decrease to levels which are more in-line with long term demographic fundamentals next year,” said Bob Dugan, chief economist for CMHC.
Dugan also noted in a press release that the existing home market conditions will remain balanced over the next two years as MLS sales ease and inventory levels remain elevated. Existing home sales will be in the range of 423,800 to 455,900 units in 2010, with a point forecast of 440,300 units. In 2011, MLS sales will move lower and are expected to be in the range of 390,600 to 483,700 units, with a point forecast of 438,400 units.
With an improved balance between demand and supply, the average MLS price across Canada is expected to edge only modestly higher in 2011, according to CMHC.