Canadian real estate markets have been a pillar of strength this decade. Strong domestic economic conditions and attractive financing rates sparked robust housing demand. This, in turn, fuelled vigorous resale home sales and new home construction. Despite rising supply coming from rapid residential building, real estate markets across the country have been generally characterized as seller’s markets, resulting in very strong and sustained price growth. Given this remarkable performance, it is natural to ask whether it can continue. The recent U.S. housing correction certainly highlights the risk that booms can rapidly turn into busts. For a variety of reasons that will be outlined below, TD Economics believes that Canada’s major housing markets will experience cooler conditions over the course of 2008 and throughout 2009, with softer sales, construction and price growth from coast to coast. However, this moderation is not expected to lead to a housing downturn. Instead, the deterioration in housing affordability from the past outsized price gains combined with additional sup-ply from new listings and continued elevated housing starts amid a weaker domestic economy should gradually let the heat out of real estate markets. The seller’s market conditions are expected to give way to more balanced supply and demand, which is consistent with moderate price growth at a mid-single digit pace in most of Canada’s major urban centres.
Highlights
• Real estate delivered an outstanding performance over the past five years, with national home price growth averaging 10% annually.
• Cooler market conditions are anticipated over the course of 2008 and throughout 2009.
• This moderation will reflect the fact that the past rapid price appreciation has eroded affordability and has encouraged additional supply from new listings and new home construction. A weaker domestic economy will also contribute to the cooling.
• A soft-landing is anticipated. Indeed, with the Bank of Canada likely to cut interest rates further in 2008 and only gradually raise rates in late 2009, the risk of a significant or sustained correction in home prices is low.
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