If TD is right, Canadian home prices will tumble 24% from their spring 2008 highs to 2010. TD’s reasoning? Overbuilding and speculation.
In a recent report, TD states: “This overbuilding will likely weigh on markets over the next few years.” However, TD “(doesn’t) envision a U.S.-style crash for Canada.” It says, “Unlike south of the border, the supply of new housing was absorbed by new owners, and Canada has more robust mortgage lending structures.”
A 24% drop would lower average home prices from their peak of $324,000, to $246,000.*
With discounted 5-year fixed mortgage rates falling from about 5.50% in April 2008 to 3.95% today, a mortgage on the average house could therefore drop from $1816 per month to $1170 per month by 2010 (assuming TD is right and that average mortgage rates stay around 4%).**
That’s a gigantic improvement in affordability. Barring massive unemployment, a improvement of that magnitude could very well light a fire under buyers and support the market.
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* Based on CREA’s non-weighted national price average. Arguably better price calculation methods do exist, such as weighted price averages.
** Assumes a 25-year amortization, a 10% down payment, and a 2% insurance premium.
It sure takes people a long time to finally ‘get it’. Hard to trust them now though. The problem is that people forecast only along trendlines. So when things were good last year, Canada was different and okay, now that we see we aren’t (which was obvious to people with real predictive powers) they predict future declines. So what’s the point in predicting for these guys, they just draw a line from a to b to find c. That’s not a prediction, that’s graphing. Anyway, yes Canada is not immune and yes big declines in RE. It shouldn’t come as a surprise.
It should be noted that different areas will react differently…
Markets which have boomed (Vancouver) will get hit much harder than others.
Also, areas with relatively stable employment (Ottawa, due to the Public Service) will probably experience a much smaller drop, if any…
Chris L hit the nail on the head.
Maybe I should wait to buy… then again, maybe I shouldn’t. So hard to tell.
These guys are no closer to accurate today than they were a year ago. I think that economics is the study of the future by looking through a mirror at the past. A distorted mirror, coloured by the flavour of the moment, either enthusiasm or terror. Fear governs at the moment.
It was interesting to listen to the claims by some back in 2007 saying all these increases were justified and would continue for many years to come. Now that we’ve seen some drops, that group has been silenced, but there seems now to be a big group of people trying to convince us that there are going to be huge US-style drops in housing prices.
I think the truth is somewhere in between. The increases in most of Canada were less, and thus the decreases in most of Canada are likely also going to be less. So, for the most part, that TD analysis seems relatively reasonable. It’s not an optimistic assessment, but it is not a sky-is-falling analysis either.
Interestingly, back before the downturn I wondered if we could see price drops of around 10% from 2007 levels in the Toronto 416 area. Since in 2009 our Toronto prices are similar to 2007 levels, that would mean about a 10% price drop from current levels. From what I gather from that article, TD seems to agree (more or less).
It was interesting to listen to the claims by some back in 2007 saying all these increases were justified and would continue for many years to come.
Baloney. Show me some evidence of these claims. I don’t remember hearing this.
Bob, I guess you’ve never spoken with any real estate agents in the past couple of years then. Even Royal Le Page’s official forecast from July 2008 continued to predict healthy price gains.
“After several years characterized by a persistent shortage of listings, home buyers have felt the pressure of bidding wars and take-it-or-leave-it counter offers ease during 2008; home sellers have had to come to grips with the longer time it is taking to sell properties, but can take comfort in a market that continues to support reasonable price increases. Our research indicates that all markets will continue to perform well, albeit at a tempered pace.”