Home for sale in Toronto.Peter Power/The Globe and Mail
Canada's housing boom is among the most long-lived in the Western world at 13 years, but the next few years could chip away at the gains that have seen the average house increase in value by 85 per cent since 1998.
In a report released Tuesday that said the Canadian housing market was the strongest in the developed world in the third quarter, Bank of Nova Scotia economists said "the slow pace of the global economic recovery, intensifying sovereign debt concerns, weak consumer confidence and high unemployment all continue to weigh on residential property markets" in 10 countries it tracks.
The malaise has already set in – of the 10 countries studied in the third quarter, average inflation-adjusted home prices were below year-ago levels in seven of them, and above in three (including Canada, where prices are 4.8 per cent higher).
The other countries to post gains were France at 4.4 per cent and Switzerland at 3.3 per cent. The sharpest declines, meanwhile, were seen in Ireland were prices were down 14.7 per cent.
"Canada remained a notable outperformer, though activity here too shows some signs of cooling.
Weak market conditions will likely persist well into 2012," economist Adrienne Warren wrote. "While the combination of low borrowing costs and lower home prices have bolstered housing affordability, there is insufficient domestic momentum in the majority of advanced nations to support a significant revival in demand. An oversupply of housing and a more cautious lending environment also will hold back the recovery."
Merrill Lynch warned Monday that prices could correct by as much as 10 per cent in the next two years in Canada because of weakness in the economy, expressing particular concern about Toronto's condo market. The Bank of Canada also warned the Toronto market looks overbuilt and could see prices drop.
"The cycle of rising real home prices is long, lasting on average 12 years," Ms. Warren wrote. "Italy's boom was the shortest at 8 years, while Ireland and Sweden count 15 years. Canada's ongoing housing boom is in its 13th year... Canada's residential real estate boom started several years later than many of its counterparts, with the economy still feeling the effects of the deep recession of the early 1990s and weak labour markets through mid-decade."
From the report:
- "The Canadian housing market remains an outperformer among advanced nations, with real home prices up 4.8 per cent y/y in Q3. While the sector’s continued buoyancy is impressive, monthly data through November suggest prices have leveled off since the spring, with conditions in the majority of local markets in ‘balanced’ territory. Ultra-low interest rates are still attracting buyers, but increased economic uncertainty combined with some recent slowing in the pace of hiring could dampen demand in the new year.
- In the United States, average inflation-adjusted home prices fell 7.5 per cent y/y in Q3, bringing the cumulative decline since the 2005 peak to over 30 per cent. Despite near-record affordability, persistently high unemployment, tight credit conditions and a lingering oversupply of unsold and foreclosed properties suggest a sustainable recovery could still be several years away.
- The French housing market remains the most resilient in Europe. Average inflation-adjusted home prices were up 4.4 per cent y/y in Q3, and are nearing pre-crisis record highs after a brief downturn in 2008-2009. Tight housing supply is underpinning prices, but these continuing gains appear unsustainable in an environment of high unemployment, government restraint and slowing regional exports.
- Switzerland’s housing market also remains relatively buoyant, with average prices up 3.3 per cent y/y in Q3.
- Ireland still holds title to the weakest residential market in our sample, with average inflation-adjusted home prices down 14.7 per cent y/y in Q3 and by a cumulative 44 per cent from their early 2007 highs. The steep and continuous price declines of the past four years have essentially wiped out a decade of price appreciation.
- U.K. house prices are declining again after a brief recovery in 2010. Real home prices have contracted on a year-over-year basis for the past three quarters, falling 6.7 per cent y/y in Q3. Spain’s deep housing slump continues, with average prices down 8.9 per cent y/y in Q3 and almost 25 per cent from their early 2007 peak.
- Prices have also recently dipped into negative year-over-year territory in Sweden, consistently one of the region’s better performing housing markets.
- In Australia, average inflation-adjusted home prices fell 5.7 per cent y/y in Q3. Even so, the slowdown follows strong gains in 2010, leaving prices near record levels. While domestic economic conditions remain relatively solid, some potential buyers have been sidelined by deteriorating housing affordability and a more uncertain global outlook.
- There is still no end in sight to Japan’s two-decade long property slump, with residential land prices down 3.3 per cent y/y in Q3."