Real Estate and Home Improvement

The issue of when and how the Canadian real estate sector will slow down seems to rely on whom you ask. For instance, TD Bank economist Pascal Gauthier bluntly said in an discussion with “Globe and Mail” this month that even though housing prices will carry on increasing by 9% more than the 2009 figures until the middle of 2011, they will then sharply drop — potentially down to 2.7 percent. However a nationwide real estate breakdown is not inevitable, retorts BMO Capital Markets’ economist Sal Guatieri, who draws attention to “The Montreal Gazette” that when the real estate bubble finally pops, it should only disturb major cities. One item they both seem to agree on, however, is that the Canadian housing sector is headed for a cooling trend — the debate is just how much and when.

Guatieri pointed out that the cost for a family residence should be “about four or five times income,” however the current market in Toronto and Vancouver is running around $700,000, which averages 10 times the income of the home owner. This type of super-inflation is what encouraged TD Bank to not equate recession recovery with housing value, because their previous projection of 1.6 percent gains in 2011 are already being compromised by the rise in the number of new listings and new housing starts this year, a strong indication of the start of the cooling direction. While condo buildings in municipalities such as Mississauga are climbing sales of Mississauga condominiums may begin to decline.

However TD did have to acknowledge in their talk with “The Vancouver Sun” that their 2009 prognosis were low, since they did not anticipate “a move by buyers and sellers to pre-empt regulatory and interest-rate changes” that caused a sharp first quarter rise in housing sales. The impending harmonized sales tax due to come online in July in Ontario and British Columbia certainly affected markets in those provinces. The shift has influenced financing costs already, with the Bank of Canada expected to raise their overnight target rate in June or July from the record breaking low of 0.25 percent.The hardest affected housing sectors could be cottage regions, like Wasaga Beach real estate, as sellers may inundate the market with properties before the deadline.

TD is of the belief that housing values are rather overvalued and that prices will continue in a downward shift well into the next year as a result of household incomes that are attempting to chase after the inflation rate. The Canadian Real Estate Association agrees that they are witnessing MLS sales decline over the past 6 months, and expect this decent to carry on and even Toronto MLS listings are showing signs of a drop. The only question that is left is what affect the lofty prices will have on the housing market as a whole in the near term and going forward.

“As a result of the stronger supply response, 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,” clarified Gauthier. But Guatieri believes the impending cool down period will not automatically signify that home values will actually fall, however sees it as a gentle change after the recent surge. Gauthier and Guatieri both perceive indicators, however, that whenever it arrives, the cooling shift will be short lived, and that the average home price should naturally come back to normal market value within the next 3 years.