Canada’s real estate market to cool, not crash

The banks have two pieces of good news for Canadian homeowners — real estate prices are expected to cool, not crash, and home ownership is becoming slightly more affordable.

Canada’s housing market is losing some of its “exuberance,” but fears of a bubble are over inflated, unless there is the unlikely situation where jobless rates suddenly soar along with interest rates, Scotiabank Senior Economist and Real Estate Specialist Adrienne Warren told a Toronto audience Wednesday.

In fact, a softening of house prices in the final half of 2011, along with income gains, helped offset record high debt levels, making home ownership slightly more affordable even in the notoriously expensive Vancouver market, according to new research from the Royal Bank.

“The improvement in affordability was a welcome reprieve for Ontario homebuyers as it helped reverse some of the notable deterioration that gripped the province in the first half of last year,” said RBC senior economist Robert Hogue in a release Wednesday.

But affordability remains “slightly strained” in the Toronto market where demand continues to outstrip supply.

“Conditions in the Toronto area still slightly favour sellers, which will make further improvements in affordability difficult in the near-term,” said Hogue.

The benchmark detached bungalow ate up about 52.2 per cent of pre-tax household income in Toronto in the fourth quarter of 2011, down 0.1 percentage points from the previous quarter. In Vancouver, where the same house accounts for a whopping 86 per cent of pre-tax income, the drop was 4.6 per centage points, RBC says.

Scotiabank noted Wednesday that high prices, tighter lending controls and slowing job growth contributed to a levelling off of Canada’s hot housing market in the second half of last year.

“We expect sales and prices will be relatively flat in the year ahead,” Scotiabank’s Warren told the meeting of investors, housing experts and city planners.

The two reports come just days after Finance Minister Jim Flaherty once again expressed alarm about historic levels of household debt, now at a record high 153 per cent of disposable income.

“I again encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because (interest) rates will go up someday,” he said, expressing particular concern about the condo booms in Toronto and Vancouver.

Warren acknowledged that the Canadian housing market may be 10 or 15 per cent overvalued and that the condo market may be due for a slowdown, partly because units are getting so expensive, they may no longer make sound economic sense for the investors who have been helping fuel the condo boom.

But condo construction will continue to far outstrip the construction of single family homes, she noted, largely because they cost an average of $200,000 less than a house, making them desirable for new immigrants, young professionals and first-time buyers.

Toronto is moving toward a buyers market, just like Vancouver where bidding wars are largely a thing of the past, Warren noted.

In fact, the really hot housing story is now in the western provinces of British Columbia, Alberta and Saskatchewan where strong job growth in the resource sectors has driven up employment, wages and, with them, higher demand and house prices.

Canada’s housing market remains “in fundamentally better shape” than most other international markets where economic and political uncertainty, high unemployment and worried consumers have deflated demand and prices.