Real Estate market should become 'more subdued'

Canada's real estate markets should remain heated through the spring, fuelled by generationally low mortgage rates, before settling into "more subdued" conditions as those rates rise, says the latest forecast from Scotia Economics.

Scotia Economics senior economist Adrienne Warren said the last decade saw "the strongest decade of real price appreciation in at least 50 years," which will require an extended period for the economy to catch up with job creation and wage increases.

"If people were looking back at the last decade thinking that was normal, well it wasn't normal, it was an exceptional decade," Warren said in an interview.

Right now, she said, buyers are "bombarded by news headlines saying, and I think they're correct," that rates have hit bottom and will go higher, which is "adding a sense of urgency" to the market.

Listings of new properties, however, have not kept pace with this surge in buying, Warren said, and the result is bidding wars for properties that have pushed average prices to test "new highs, both for new and resale homes."

Warren estimates that nationally, average prices are about 10 to 15 per cent above their underlying "fair value," with some western markets likely more out of line.

"We haven't broken it down for specific markets, but I would say there's probably a little bit of a larger overvaluation in some western markets that had bigger run-ups [in prices]," Warren said, "so that would probably apply to Vancouver."

After a sharp fall-off in sales and prices during the recession, Warren said Metro Vancouver saw an equally sharp bounce back.

The dip in prices for Vancouver barely shows up in the annualized pricing data Warren cites in her global real estate trends report.

Metro Vancouver showed an average home price of $592,441 in 2009 following the downturn, which was negligibly lower than the $593,767 average price of 2008.

Already in the opening months of 2010, Vancouver's average price has hit $630,028.

The Metro Vancouver market, Warren said, does tend to retain high prices because of its unique geographic constraints, which makes the region "the least affordable market [in Canada] as well."

Warren said she expects mortgage rates to remain relatively low and that, so long as the economic recovery continues, Canada will not experience the conditions that would spark a correction of real estate prices.

She forecasts Canada will see a "normal adjustment period," in which property prices remain relatively flat for a significant period while other aspects of the economy improve.

Warren's forecast anticipates that Canadians will focus more on paying down debt in the coming years, a period during which a strong Canadian dollar will also restrain the economy.

She also expects the growth in new households to be slower through the coming decade than it was during the previous decade.

("Market should become 'more subdued' after hot spring" prepared by Derrick Penner/Vancouver Sun)