August 8, 2012 - With record home ownership levels in Canada and a cooling housing market, home prices in Canada can be expected to fall 10% over the next two to three years, a Bank of Nova Scotia report suggests. “After this period of very strong home sales, where you’ve essentially got home ownership across most demographics at record levels, even for young buyers, combined with tighter mortgage rules and the like, there’s just not going to be the same amount of demand out there,” Scotiabank economist Adrienne Warren said Wednesday.
Canada’s home ownership level has hit a record 70%, which the economist said is likely a peak, due to an aging population, as well as younger entrants to the market.
“If we compare to other countries that are similar-type demographics and mortgage markets to Canada, like the U.S., the U.K. or Australia, they all essentially peaked at around 70% level. There’s a limit because there’s always going to be a certain amount of renters for economic reasons or personal choice,” Ms. Warren said.
In 1961, homeownership was at 60%, Ms. Warren said, climbing after the turn of the millenium to almost 68%.
Scotiabank’s report joins a growing chorus of warnings about Canada’s housing market, with some economists predicting even larger drops as record high prices and tighter regulations make it harder for buyers to enter the market.
The biggest corrections will be in Vancouver, where affordability is a problem, and Toronto, where there is an over-supply of condos, the report suggested.
Ms. Warren said some Western markets, such as Calgary and Saskatoon, may outperform as resource development drives immigration for local jobs. Alberta and Saskatchewan are the only two provinces with net population increases of newcomers from other provinces.
Financial author and investment advisor Garth Turner said there is a new “middle ground” starting to emerge that there’s going to be a bumpy landing.
Two demographics stand to lose out the most: Babyboomers, whose net worth is tied up in real estate, and young professionals in the condo market, Mr. Turner said.
He said Boomers looking to sell houses to downsize will face a stagnant market after already seeing their property values fall at least 10-15%.
“The boomers overall have the bulk of their net-worth in residential real estate. It is the most real estate-centric generation in history,” Mr. Turner said.
At the other end of the demographic spectrum, Mr. Turner said young couples that bought condos on very light downpayments will get stung by the decline.
“The young buyers who have no equity will have real estate values go down, even 10 or 15%. They’re under water. How many of those kids thought they were going to buy condos that were worth less in three years?” he said.
The president of one of Canada’s largest real estate companies says there will be softening in the market, but not to the extent of Scotiabank’s predictions.
“I’d say in the medium-term in 2012-13, it’s highly unlikely we’d see a double-digit decline in national average house prices,” said Phil Soper, president and chief executive of Royal Lepage.
The bumpy landing is unlikely, he said, because low interest rates will continue, there is a “real economic recovery” on the horizon, and he does not the buy pent-up demand analysis in the Scotiabank report.
“[Pent-up demand] was satisfied a long time ago in 2010 and really 2011. We’re serving first-time buyers, new Canadians and other sustainable buyer segments now,” he said, adding a 70% homeownership rate doesn’t command a sudden retreat. Rather, Mr. Soper said, fundamental changes in the market, such as the shift to build more condominiums and less rental properties, means ownership could still rise.
“It’s not necessarily a peak. There’s nothing magic about 70% other than it’s higher than it has been,” Mr. Soper said.
(c) 2012 Financial Post