Home sales, prices continue to slide: economist

Homeowners should brace for another year of sliding real estate sales and prices across Canada, warns Bank of Nova Scotia senior economist Adrienne Warren.

Ms. Warren is forecasting a drop of 15 to 20 per cent in the volume of existing-home sales in 2009 compared with 2008.

The average resale price will fall 10 per cent, Ms. Warren predicted at the bank's annual real estate outlook conference.

Last year, average home prices dipped 1 per cent. The decline marked a reversal from the 10 per cent annual increases that gave homeowners a feeling of increasing wealth during the long-running boom between 2002 and 2007.

The picture worsened dramatically as 2008 wound down, so that by January of 2009 the national average price tumbled 11 per cent compared with the same month last year (though Ms. Warren adds that, crunching the numbers on a regional sales-weighted basis, the drop was a more modest 5 to 6 per cent in January).

Looking ahead, Ms. Warren says Vancouver, Sudbury and Calgary could see an even worse decline than the national average this year because those cities have the greatest imbalance between supply and demand.

Meanwhile, Ms. Warren says the federal government's recently announced renovation tax credit for households should bolster the renovation industry in 2009.

The growth in renovation spending slowed to about 4 per cent in Canada in 2008 from about 8 per cent annually in previous years this decade.

While the tax credit should encourage homeowners to spend on renovations and repairs, the concomitant drop in existing-home sales and prices will likely weigh down spending, she adds.

Ms. Warren says Canada's cyclical boom in housing began to wind down late in 2007 as several years of climbing prices carried affordability out of the reach of average income-earners. A ramp-up in new building led to over-supply.

But that cyclical downturn was exacerbated by the dramatic economic decline in North America.

Looking at the broader picture, Scotiabank chief economist Warren Jestin said the “bare essential” for economic recovery in North America is the stabilization of house prices in the United States.

Mr. Jestin is forecasting a 1.5 per cent decline in Canada's gross domestic product this year and a 2.5 per cent decline in U.S. GDP in 2009.

Mr. Jestin says there are many people in the United States who are able to buy a house but are just holding off because they think the timing is not right.

There's another element, however, that didn't have close to enough income to carry a mortgage long-term, and that group, which accounted for 25 per cent of all mortgages between 2004 and 2007, isn't coming back to the market.

“They're out,” says Mr. Jestin of the subprime mortgage holders.

As a result, the excess supply that resulted from over-building in the U.S. will take a long time to absorb.

In Canada, interest rates could have further to fall this year, says Mr. Jestin. But looking out to 2010, he says the United States and Canada could see higher bond yields and higher mortgage rates if the investors who are currently seeking security and liquidity shift their emphasis to looking for yield.

Mr. Jestin says his travels and research have convinced him that Canada's stable banking system and conservative lending policies mean the country has far better buffers than most developing and emerging economies.

“If you want to live in any country right now during the economic storm, you're living in the right one,” he says.

(prepared by Carolyn Ireland/Globe & Mail)