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A ‘For Sale’ sign outside townhouses in the Fairview neighbourhood of Vancouver, March 4, 2013.\Rafal Gerszak/The Globe and Mail

Canadians shouldn't get too wound up by the idea that a housing-market slowdown will erode the value of perhaps their biggest investment asset. On the other hand, they shouldn't expect massive returns on that investment over the next decade, either.

This is the wisdom contained in a report Monday from Toronto-Dominion Bank economists Craig Alexander, Derek Burleton and Sonya Gulati. While they don't anticipate a sharp crash in Canadian home values over the next few years, they warned that the downturn will likely be followed by lower-than-historical annual returns over the next decade.

"The housing market is prone to cyclical ups and downs, and we should embark on a gradual, modest downward adjustment over the next three years," they wrote. However, "a string of lacklustre performances will mean that the annual rate of return for real estate in nominal terms will be roughly 2 per cent over the next decade. In other words, home price gains should simply match the pace of inflation."

The economists projected that returns beyond 2015 – i.e. after the pullback – should average about 3.5 per cent over the long term. That's considerably lower than the 5.4-per-cent annual average Canadians have enjoyed since 1980.

Several factors go into this projection, and the biggest is inflation. Since 1980, Canada's average annual inflation rate has been 3.3 per cent. But with the Bank of Canada targeting 2 per cent, we can expect that to be roughly the average long-term inflation rate in Canada from here out.

So, that 5.4-per-cent average nominal return on house prices since 1980 works out to 2.1 per cent in real terms (i.e. after deducting the impact of inflation). By contrast, the bank's long-term projection of 3.5 per cent (nominal) equates to 1.5 per cent in real terms.

While this isn't a huge gap, it does indicate an expectation that real returns from residential real estate are destined to moderate in the longer term. The TD economists point to several macroeconomic trends that point to more modest price gains over the long run.

One is a generally lacklustre long-term projection for Canada's economic growth, which the bank sees averaging about 2 per cent annually in real terms by 2021. It says declining workforce participation and weak productivity growth will keep a cap on Canada's economic potential and will moderate personal income growth, restraining pricing power in housing. Borrowing costs are also likely to rise from their current historically low levels.

Demographics also play a major role in their projection. The aging of Canada's overall population, coupled with slowing population growth, will slow the annual pace of new-household formation in Canada to about 150,000 over the next 20 to 30 years, from roughly 190,000 today – thus reducing demand for new homes.

However, the authors acknowledged, the market could make its own adjustments to these trends that would help offset their impact on price returns. If home builders slowed their construction pace and mortgage providers lowered interest rates in response to the expected reduced demand, this could add some fuel to prices.

"There are several structural changes on the horizon, including an aging populace and population growth increasingly driven by immigration," they concluded. "The relationship between these trends and housing demand is not yet agreed upon."

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