September 26, 2020

Real estate positives balance negatives, housing markets should remain stable in 2012: BMO

By Kim Covert, Financial Post September 29, 2011

OTTAWA — Housing sales and prices should remain fairly steady into next year, as a slowing economy is balanced by low mortgage rates and relatively low unemployment, a report issued Friday by BMO Capital Markets suggests.

“Low interest rates have fuelled Canada’s housing market in the past decade, pushing prices to new highs in most regions,” said senior economist Sal Guatieri. “However, a weaker economy and new mortgage rules have dimmed activity recently.”

Resales have slowed to their past-decade norm, with the tougher mortgage rules introduced by the federal government in March, and prices have flattened in the last six months on a seasonally adjusted basis, Guatieri said in the report.

The slowing global economy should hold the Bank of Canada from raising its benchmark interest rate — now at a near-record low of one per cent — before 2013, which will keep borrowing affordable. As well, an unemployment rate expected to remain around 7.3 per cent through next year — below its two-decade norm, Guatieri notes — should mean continued confidence on the part of homebuyers.

Guatieri also points to immigration as a factor in keeping home prices and sales steady through 2012, as their increased numbers support demand, particularly in urban areas.

“Meanwhile, Canada’s relatively sound fiscal finances have made it a desirable destination for non-residents to park their wealth during these uncertain economic times.”

There are a number of factors offsetting these positives, however, including stagnating wages. “Prices have risen twice as fast as incomes in the past decade, lifting the current ratio 16 per cent above its norm,” he said.

Canadians already burdened by record levels of household debt are reluctant to take on big mortgages, particularly as job and income growth is expected to slow along with the general economy next year.

Just as the economies in resource-rich provinces such as Alberta and Saskatchewan are expected to out-perform other regions next year, so too is the housing market in those provinces, Guatieri said.

But even as an over-valued housing stock puts a new home out of the reach of many first-time buyers, it also makes the market vulnerable to a correction, Guatieri warns.

“The biggest threat stems from the perceived one-in-three chance of a recession, and the attendant loss of jobs,” he said. “Another risk, though far smaller, is if interest rates spike higher next year.”

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