The downside risks to Canada’s housing market are increasing, according to a Special Report on Canadian Housing released by Scotiabank.
But any market correction will primarily involve Canada’s major markets in Vancouver and Toronto, rather than medium-sized centres such as Winnipeg.
As the old real estate adage says: regional housing market conditions are primarily influenced by local factors — not national trends.
In fact, Canada Mortgage and Housing Corporation is forecasting two years of new home building growth. According to CMHC, single-family detached housing will increase to 1,100 units in 2012, and remain at the same pace in 2013.
CMHC reported that the pace of new home and multiple-family construction will be driven by gains in employment and wages which will continue to attract new migrants.
CHMC forecasts that Manitoba MLS® sales will rise to 14,200 units this year and then to 14,400 units in 2013.
The average price of a resale home in Manitoba is expected to rise by 4.7 per cent this year and by 3.4 per cent in 2013.
“The province’s largest market, Winnipeg, will continue to experience a scarcity of listings in the face of steady demand,” according to CMHC.
“Canada’s housing market is expected to avoid the sharp downturn witnessed in the United States and Europe,” said Adrienne Warren, senior economist at Scotiabank. “However, the downside risks to domestic housing activity are increasing. The full impact of the slowdown may not become fully visible until mid-decade.”
According to the report, record prices combined with incremental regulatory tightening are reducing affordability and the housing market’s earlier momentum, notwithstanding the lowest borrowing costs on record. Pent-up demand has been effectively exhausted after a decade-long housing boom, with Canadian homeownership at record levels. The global outlook also has become much more challenging.
“Average Canadian home prices will eventually decline a cumulative 10 per cent over the next two to three years, as housing demand softens and buyers’ market conditions re-emerge for the first time in over a decade,” said Warren. “The correction will be concentrated in the Toronto and Vancouver markets, where supply risks and affordability pressures have the potential to trigger larger price adjustments."
Canadian household balance sheets remain in reasonably good shape, with homeowners' equity in real estate assets averaging 67 per cent compared with 41 per cent in the United States.
Nonetheless, high personal debt loads and balance sheets heavily skewed to real estate leave Canadians vulnerable to an adverse shock, including a sharp rise in unemployment and/or a sharp drop in home prices.
“The multi-year rise in home prices in Canada has pushed housing valuations to record levels, whether measured by the ratio of national house prices to household disposable income or by a house price-to-rent ratio,” said Warren. “Both measures may be in the process of plateauing, but are unlikely to decline until house prices and unit sales move decisively lower.”
The report also notes that certain market segments are at risk of oversupply, including the expanding condominium markets in several of Canada’s largest centres, notably Toronto and Vancouver. Current high-rise projects are being supported by strong demand. However, the ongoing high level of condominium construction underway combined with an elevated level of unsold units in the pipeline raises the risk of a sharper price correction to any weakening in demand.