Housing market correction 'appears to be under way'

These are stories Report on Business is following Tuesday, Sept. 17, 2012.

By: Michael Babad

Housing correction likely 'under way'A correction in Canada’s housing market “appears to be under way,” led by Vancouver but destined to spread after the government’s new mortgage restrictions, Toronto-Dominion Bank warns today.

“We expect the slowdown will become more broad-based following a fourth round of mortgage insurance regulation tightening by the federal government in July,” economists Craig Alexander, Derek Burleton and Diana Petramala said in a new report that also warns Canada’s economy is “stuck in a soft patch” this year.

This housing correction will weigh on Canada’s over all economic growth, the TD economists added
“For some time now, TD Economics has been warning that the Canadian housing market was overpriced and overbuilt, setting the stage for a gradual correction to take place over the medium term,” they said.

“The tide seems to have finally turned. The combination of market fatigue, stricter lending guidelines for insured mortgages and a deterioration in housing affordability is helping to put the brakes on housing activity.”

They cited the fact that sales and prices in Vancouver have slumped by 31 per cent and 7 per cent, respectively, over the past year.

Of course, Canadian interest rates are expected to remain low well into 2014, so there’s only so far that prices can fall. TD said it still estimates the market is overvalued by 10 per cent.
“The adjustment is expected to occur gradually over the next two to three yars, which should be quite manageable for most Canadian households,” they said.

The market has cooled noticeably. Just yesterday, the Canadian Real Estate Association said home sales slipped 5.8 per cent in August in July. That was the steepest drop since mid-June 2010. And average prices now sit just 0.3 per cent above the levels of a year ago.

There’s mounting evidence that prospective first-time homebuyers in Canada are deciding to keep renting, amid the new mortgage rules and a softer market.

As The Globe and Mail’s Tara Perkins reports, real estate agents and observers are seeing it play out in the market in the wake of the new restrictions.