Don't panic on house prices

Homeowners of B.C. -- welcome to the little chill.

B.C. householders fearing that the U.S. recession will hammer real-estate prices can relax -- the provincial market will gradually cool rather than collapse, Toronto-Dominion Bank predicts.

B.C. resale home prices are expected to post an average gain of 9.1 per cent this year, slowing to a 5.6-per-cent increase next, the bank said yesterday. In both years, B.C. should enjoy Canada's second-fastest price growth after Saskatchewan, the report said.

This outlook represents a modest decline from heated growth of 17.7 per cent in 2006 and 12.3 per cent in 2007, TD said in a report.

The risk of a real-estate bust -- a sharp or sustained correction -- is low, TD said.

"Western Canada will continue to post economic-growth rates above the national average, supporting stronger relative housing demand fundamentals," the bank said.

"Central Canada, and particularly Ontario, is more vulnerable than most other regions to the weakness south of the border."

New home construction in B.C. is expected to rise slightly this year to 40,000 units from 39,200 last year, TD said.

The supply of new homes should help to cool Canada's resale market, the bank said.

Slower economic growth will cause price increases to ease -- as will the soaring cost of home ownership.

"The Western centres of Vancouver, Victoria, Calgary and Saskatoon have experienced a shocking deterioration in affordability, particularly for detached bungalows," the report said.

"Weakening in affordability is not consistent with a continuation of the price and sales growth that was experienced in 2007."

Canada will dodge the turmoil afflicting the U.S. housing market because it avoided the high-risk loans commonplace below the line.

The risk of a correction in Canada will rise if home-price growth does not slow, or even worse, picks up speed, the bank said.

If prices refuse to slow, rising interest rates next year and in 2010 "could create significant challenges for urban centres where affordability is still stretched [and] for cities where speculation has remained strong," the bank warned.

In a separate report, the International Monetary Fund said Canada and Austria are less vulnerable to a big house-price correction than any other advanced economy.

Canada and Austria were the only two countries out of 17 where house prices were undervalued in 2007, based on economic fundamentals, the IMF said.

"Countries that look particularly vulnerable to a further correction in house prices are Ireland, the United Kingdom, the Netherlands and France," the IMF said.

"It is difficult to account for the magnitude of the run-up in house prices on the basis of those countries' fundamentals."

(prepared by Paul Luke/Vancouver Province)