Canada’s real estate market is due for a “moderate correction” with homes that are anywhere from 10 to 15 per cent overvalued, says the TD Bank.
“The excessive pricing of Canadian housing in relation to fundamentals is now clearly correcting,” TD Bank economist Grant Bishop said in an economic note Monday. “We expect a moderate correction in prices over the coming year.”
The bank is forecasting a “downward correction of 10 per cent in monthly average prices, followed by several years of stagnation of price growth,” according to Bishop.
TD says affordability was steadily eroded during the house price surge of late 2009 and early 2010, with carrying costs rising relative to average household incomes.
“The current level of household debt flags the need for households to slow their borrowing,” said the bank.
TD is the latest major financial institution to rain on the real estate parade. Other Canadian economists have said the market is overvalued by as much as 25 per cent. The Canadian Real Estate Association (CREA) also revised its figures downward this month.
Canadian existing home sales continue to decline rapidly, thanks to a drop in activity in Ontario and British Columbia, according to a monthly report by CREA on Monday.
Seasonally adjusted national home sales were down 6.8 per cent in July compared with June. On a year-over-year basis, national sales activity was down by 30 per cent compared with July 2009. It was the third month in a row that sales have declined.
“The market went up faster than most people have expected and it’s going down more quickly than we had anticipated,” said BMO Capital Markets senior economist Sal Guatieri.
The average price of homes sold through CREA’s Multiple Listing Service in July was $330,351, only one per cent higher than the same month a year earlier.
Year to date transactions are still up by 5.6 per cent in the first seven months of the year.
“It looks like anyone who wanted to buy a house in Canada got their shopping done early,” said Doug Porter, deputy chief economist for BMO Capital Markets.
“The combination of tighter mortgage insurance rules, a modest back up in borrowing costs, and the HST have delivered a hammer blow to sales.”
Meanwhile, CREA is warning that there are likely more dismal sales numbers in the months to come.
“The gap is expected to shrink as the year progresses since activity rose sharply over the second half of last year, reaching levels that are unlikely to be matched in the final five months of 2010,” the association said in its report.
What may keep prices from falling more dramatically is that new supply seems to be trending down. Seasonally adjusted figures for new listings show that they declined by 7.2 per cent in July compared with the prior month. This is the third consecutive month over month decrease.
“We went from a period last year during the recession where we saw very few listings, then a lot more listings earlier this year when the market improved,” said Guatieri.
“Now you’re seeing fewer listings as vendors see the market softening as they take their homes off the market because they’re worried they may not get the price they’d like to see.”