The downside risks to Canada's housing market are beginning to increase, and home prices could face a 10% drop by 2015, according to a new report by Toronto-based Scotiabank.
‘Canada's housing market is expected to avoid the sharp downturn witnessed in the U.S. and Europe,’ says 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.’
The report notes that the Canadian household balance sheets remain in reasonably good shape, with homeowners' equity in real estate assets averaging 67% compared with 41 per cent in the United States. However, the report adds that 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.
‘Average Canadian home prices will eventually decline a cumulative 10 percent 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,’ Warren continues. ‘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.’
The report also notes that certain market segments are at risk of oversupply, including the expanding condominium markets in several of Canada's largest centers, notably Toronto and Vancouver. The ongoing high level of condominium construction under way, combined with an elevated level of unsold units in the pipeline, raises the risk of a sharper price correction to any weakening in demand.