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Report says most centres categorized as sellers’ markets
Sep 21, 2007

The continuing trend of rising home values is not sustainable over the long-term, however, the end to escalating prices will be a soft landing, according to the latest Real Estate Trends released by Scotia Economics.

“The fundamentals underpinning Canada’s housing market are still quite good,” said Adrienne Warren, senior economist, Scotia Economics. “Unemployment is low, immigration is high and apartment vacancy rates are tight. 

“There is little evidence of overbuilding or speculative buying. The industry also has relatively little direct exposure to subprime lending, with these loans accounting for only about five per cent of domestic mortgages in recent years compared with about 20 per cent in the United States.

“Yet, there is little doubt that current trends are unsustainable,” added Warren. “Affordability is becoming increasingly stretched for many would-be buyers after almost a decade of rising home prices. More recently, economic risks have increased in the wake of the intensifying financial market turmoil stemming from the U.S. subprime mortgage problems.”

Nationally, sales of existing homes climbed to a fourth consecutive record in July, while the average price topped $310,000 for the first time, which the report indicated was primarily due to low inventory of housing stock on the market.

From a long-term perspective, there is growing evidence of overvaluation in home prices in some parts of the country, according to the report, a precursor to a period of softening conditions. In all 15 cities examined in the report, with the exception of St. John’s, current inflation-adjusted price levels are above their long-term trend. 

The national average deviation at mid-year was roughly eight per cent, however, there are big regional variations, ranging from just one per cent in Ottawa to 25 per cent in Edmonton.

“Some deviation from underlying trends is to be expected at the late stage of a housing boom,” said Warren. “At the peak of the prior two housing cycles in 1976 and 1989, national home prices were 12 per cent and 18 per cent, respectively, above their long-term trend. 

“The smaller degree of overshooting this time around, and the sustainability of price appreciation, may reflect in part an undervaluation of Canadian real estate prices in the late 1990s and into the early part of this decade,” she added.

Canada also ranks relatively low in the degree of house price overvaluation relative to other major developed nations. The Economist magazine estimates that average real home prices in the United States carried a near-record 14 per cent premium in 2005. U.S. average valuations have since slipped below trend amid a large and growing supply overhang and weakening demand.

Despite the deviation in the level of Canadian home prices from long-term trends, price growth remains consistent with short-term supply-demand dynamics. Most major markets in Canada are still categorized as sellers’ markets in which prices would be expected to rise faster than inflation, including Winnipeg. 

By and large, those cities enjoying the biggest price increases are also facing the tightest supply-demand conditions, including Regina and Saskatoon.

“The further domestic home prices climb above underlying economic fundamentals, the greater the risk of aneventual correction,” said Warren.

“The 1976 and 1989 housing peaks were both followed by some adjustment in real prices. In the past, this adjustment has normally occurred though a period of inflation erosion as opposed to nominal price declines,” she added.