Canada housing boom is going to slow down, TD report says

The housing-market boom currently enjoyed in Canada will not last, warns a report released Tuesday by TD Economics.

The result will likely be some stagnation of property values down the road.

The report, written by economist Pascal Gauthier, noted the sharp V-share housing cycle that was seen between the previous market peak in 2007, the bottom in late 2008 and early 2009, and now.

Compared to the 2007 peak, Gauthier said existing-home sales were down 40 per cent and prices off 12 per cent at the bottom of their cycle.

But as of October, sales were up 74 per cent and prices ahead 20 per cent from the depths.

Such data make the sharp and sudden downturn seem like "a blip," the paper asserts, or something along the lines of an "innocent bystander getting unfairly sideswiped by fears of a U.S.-style downturn and rock-bottom consumer confidence in the midst of an extreme financial crisis."

However, Gauthier said Canada's housing slump was grounded in economic reality.

He estimates homes were about 10 per cent overvalued at their peak in 2007, meaning their subsequent 12- per-cent correction put them closer to justifiable levels.

But he said with sales and prices recovering to 2007 levels and beyond, the typical home right now is about 12 per cent overpriced.

"The misalignment of home prices with their fundamental drivers, such as demographics and income, cannot last," Gauthier wrote.

"That much is known. What is less clear is the exact timing of when and precise channel by which the two will eventually realign."

The Canadian housing market has outperformed the overall economy for most of this year, but by 2011, this dichotomy will be reversed, the TD report said.

"While the economy will strengthen, resale housing market conditions will weaken," Gauthier said.

He argued that a number of factors will come into play to slow down the housing market.

Those factors include eroding affordability, the end of pent-up demand sales from those who held off during the financial crisis, and the eventual rise of interest rates.

Gauthier even evokes the dreaded B-word, asking, "Is a bubble brewing in Canadian housing?"

However, he goes on to say that "the most likely outcome is a soft landing and relative stagnation of home values in real terms . . . over the 2011-13 time frame."

But in the shorter term, Gauthier feels a tight home market will help propel home values another nine to 10 per cent over the course of next year.

However, for 2011, he said housing prices "will struggle to keep up with CPI inflation."

(prepared by Derek Abma/Financial Post/Vancouver Sun)