Red-hot Canadian house prices are expected to settle down in the next five years, providing some relief for new home buyers in an environment of rising mortgage rates.
The cost of a new home will stabilize somewhat in 2007, with the average price in Canada expected to hit $378,161 this year, up 6.3 per cent from 2006, according to a study by mortgage insurance firm Genworth Financial, Inc. and the Conference Board of Canada. Last year new home prices rose 9.7 per cent from the year before.
In the longer term, new home prices are expected to average a more modest increase of 3.4 per cent per year from now through 2011, the study suggested.
Resale homes are expected to follow a similar trend, with prices across the country also expected to rise 6.3 per cent this year to an average of $293,475. This compares with an 11.1 per cent price spike from 2005 to 2006. This rapid pace is seen cooling to an average increase of 4.7 per cent through 2011.
"With the rapid pace of price increases over the last three years, affordability has been stretched in some communities, but now we're seeing what looks like more manageable growth over the next half-decade," said Peter Vukanovich, president of Genworth Financial Canada. "Increased affordability translates into better opportunities for first-time home buyers."
House price increases have been particularly dramatic in resource-rich Western Canada, with the cost of homes in cities including Edmonton, Calgary and Saskatoon leading the charge. At a forecasted $505,571 for 2007, the average cost of a new home in Calgary is now closing in on that of Toronto at $518,401. Vancouver remains the most expensive city in Canada to purchase a new home at an expected $673,706 in 2007, according to the report.
A recent report by RBC Economics suggested housing affordability, or the proportion of pretax income an average household requires to own a home on a monthly basis, worsened in Alberta, Saskatchewan, Manitoba and Quebec in the first three months of the year. In Saskatoon, for example, the average home price has risen to $234,500, a 44 per cent increase from the year before, according to the Saskatoon Region Association of Realtors.
So far, it appears that price increases haven't dissuaded home buyers from entering the markets. Resale sales activity reached a new record in May, according to a report today from the Multiple Listing Service. Home sales activity rose 11 per cent year-over-year in May, 2007.
Mortgage rates have also been on the rise in Canada, with the posted rate for five-year fixed mortgages hitting a five-year high recently on expectation that interest rates in the country will go up this year. However Canada does not appear to be in line for the same problems as the U.S. housing market which has seen a surge in defaults on sub-prime mortgages, according to the Bank of Canada's Financial System Review, which was released this morning.
While the ongoing impact of a slowdown in the U.S. housing market could hurt Canada's export sector and the value of assets held by some Canadian banks, "the overall impact on the health of Canadian financial institutions is likely to be limited," the Bank of Canada said in its report.