Housing market cools but major meltdown not expected

The housing market is cooling, the only question is by how much, according to government and private-sector forecasts released Thursday.

Sales of existing homes, which have fallen for four straight months now, will plunge 15 per cent this year from last year's record level, and the average increase in prices will ease to five per cent, Scotiabank forecast Thursday.

After many false calls, there is now convincing evidence Canada's housing market has come off the boil, it said. In fact, once adjusted for inflation, the average resale price in Canada declined for the first time in seven years during the first quarter, Scotiabank said.

"Price gains should slow further in 2009 with the return of a balanced market for the first time in a decade," said Scotiabank economist Adrienne Warren. "Meanwhile, housing starts are projected to gradually moderate, returning toward underlying annual household-formation levels of around 180,000 by the end of the decade, from the current 225,000 unit range."

The cooling, however, should moderate in 2009, she said in an interview.

Scotiabank's projected plunge in sales this year was nearly double the 8.5 per cent drop expected by the federal housing agency, which also released its forecast for sales, prices and housing construction starts for this year and next.

However, neither Canada Mortgage and Housing Corp. nor Scotiabank expect a major housing market meltdown, as followed previous housing booms in the 1980s and 1970s, or has occurred over the past year in the United States.

"Despite a slowdown of . . . sales, demand remains strong by historical standards," CMHC said, projecting that home prices would continue to outpace inflation this year and next, rising 5.1 per cent this year to a national average of $323,000, and 3.3 per cent next year to $333,500.

Scotiabank's Warren said there are a variety of reasons for confidence in the continued health of the housing market. Unlike in the U.S., home prices in Canada are not substantially overvalued, the real estate market is not overbuilt and households are not over-leveraged, she said.

Still, the 10 per cent average annual increase in home prices over the past half decade was unsustainable, and a return to more historical norms is a welcome development, Warren said.

"At the end of the day, we predict a soft landing for the Canadian housing market, with somewhat lower sales and construction," Warren said.

However, Scotiabank cautioned that a major risk to the outlook would be a deeper and more protracted downturn in the U.S. economy, with more serious repercussions for Canada's economy and jobs and incomes.

(prepared by Eric Beauchesne/Vancouver Sun)