House prices to fall next year

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A "demand-driven downturn" will drive house prices lower by the end of 2011, the association which represents the country's 100,000 real estate agents said Wednesday.

In an updated market forecast, the Canadian Real Estate Association said the national average resale price will reach a record $325,400 by the end of this year, a gain of 1.6 per cent from current levels.

And while most markets are expected to post "modest" price gains in 2011, lower prices Ontario and British Columbia will drag the national average down by 2.2 per cent.

Its January forecast called for a 1.5-per-cent decline.

"With interest rates soon expected to rise, Canada is widely believed to be entering a typical demand-driven downturn due to recent prices increases and rising interest rates," said the organization's chief economist Gregory Klump.

Tougher mortgage qualification rules and the threat of higher interest rates caused many buyers to jump into the market sooner than they may have otherwise, he said, effectively stealing sales from the second half of the year.

"CREA had previously forecasted sales would remain at elevated levels through the first half of 2010 before easing in the second half of the year and over 2011," the association said in a statement.

"It has been pulled forward, with the fourth quarter of 2009 marking the peak of national activity. This has had the effect of lowering the forecast for national activity over the rest of the year and in 2011."

CREA expects 490,600 units will be sold this year, a 5.5 per cent jump over 2009 and the second highest level on record. Sales will drop by 8.5 per cent in 2011, however, compared to its previous forecast of 7.1 per cent.

There is no threat of a "U.S.-style housing price correction," CREA said, because of "Canada's solid mortgage market trends, conservative lending practices, and prudent borrowing by home buyers."

The report echoes a recent reports, which have also predicted prices will move lower in the next year. CIBC World Markets economist Benjamin Tal said last week that prices could fall by as much as 10 per cent in the next two years.

TD Bank suggested last month prices could fall by 2.7 per cent in 2011, while Canada Mortgage and Housing Corp. called for higher prices in 2011, with an anticipated gain of 1.3 per cent.