Softer sales to cool real estate market

Canadian housing markets should cool down some this year and next with softer sales, construction and price growth from coast to coast. But an expected cut in interest rates by the Bank of Canada will likely soften the blow, says a forecast from TD Economics.

“Canada’s real estate markets have been a pillar of strength this decade,” TD deputy chief economist Craig Alexander said in his report, released yesterday. “But the recent U.S. housing correction certainly highlights the risk that booms can rapidly turn into busts.”

Over the past five years, Canadian real estate, driven by demand in the western provinces, has seen an average 10 per cent gain annually. But the latest data show the market has already started to cool, with growth having peaked in some cities, including Calgary and Edmonton, where prices have fallen. “A weakening in affordability is a strong signal that it is only a matter of time before sales moderate and market conditions become more balanced,” Alexander said.

In Toronto, home sales have fallen for three straight months since the beginning of the year. The low figures could be distorted due to poor weather conditions and the introduction of a land transfer tax, the report said. “As a result, a rebound in the spring may be in the cards, but then a renewed moderation should unfold.”

Short-term rates are forecast to be lower by one and a half percentage points by the end of the year. Five-year fixed rates are not expected to come down significantly because of continuing problems in the credit markets. The Bank of Canada is forecast to gradually tighten rates by late 2009 and leading into 2010.

Real estate conditions would have likely cooled sooner if not for new financing products such as extended 40-year mortgages, which has delayed the impact, the bank’s report says. The mortgages, preferred by some first-time buyers, have been criticized for adding massive debt to consumers who may never pay off their homes.

One concern remaining is over condominium building ““ Toronto is North America’s largest site for this type of product. But TD said it’s impossible to figure out how many speculators are in the market to make an accurate forecast. “The main concern on the condo front is the extent to which purchases are being made for speculative purposes which would make them more vulnerable to price swings,” Alexander said.