Housing market may see another good year

Saturday, October 10th, 2009

Jay Bryan

Homes in Canada are near their most affordable in nearly four years, setting the stage for a continuation of today’s perky real-

estate market throughout the coming year.

At least, that’s the opinion of economist Pascal Gauthier at the Toronto-Dominion Bank, who calculates that the cost of paying off a typical Canadian home has fallen to less than 28 per cent of an average income, down from a peak of 32 per cent just before the market slumped last year.

At its cheapest early this year, the market offered even better bargains, with this carrying cost dipping as low as 26 per cent of incomes.

While this has edged up, Gauthier thinks future price gains will be moderate enough not to boost the cost of homeownership much more.

That’s because markets should keep from getting too far out of balance, with the rocket fuel of cheap mortgages offset by fading pent-up demand.

The pent-up demand was created when financial fears late last year scared about 50,000 would-be buyers out of the housing market, Gauthier estimates.

This happened after the collapse of New York investment bank Lehman Bros. and the near-failure of several other banks and insurers triggered fears of a global crisis in finance.

As such worries diminished, potential homebuyers were faced with what Gauthier calls “an incredible window of opportunity” where both home prices and mortgages were available at bargain rates.

In that environment, many of the same buyers who were frightened out of the market last autumn have come back to snap up homes at an accelerating rate, helping home values to recover earlier losses in many cities.

Montreal was “a pleasant surprise,” says Gauthier, and prices never fell at all.

They merely slowed their rise, which has since regained strength.

But pent-up demand from the dark days of last year is nearly exhausted, he believes, and won’t be propping up sales for more than another month or so.

Mortgage rates will remain low through much of the next year, of course, which should continue to buoy the market, but as time goes on there will be a couple more moderating factors.

First, prices, having rebounded, will begin to act as a brake on the attractiveness of buying.

Second, higher prices will make it increasingly attractive for existing homeowners to list properties for sale, making it harder for others to hold out for top dollar.

These factors should eventually rein in price gains to roughly the rate of inflation.

By 2011, Gauthier expects average values across Canada to be rising about two per cent.

The exception would be the lower-priced markets in eastern Canada, where Montreal, Ottawa and Halifax never had a red-hot runup in the cost of housing, so there’s more room for future increases.

Another outlier — in the opposite direction — could be Vancouver, which Gauthier calls “the most worrisome” market in the country.

It went into the past year’s recession with home prices close to bubble levels and its plunge in values has been almost entirely erased, lifting the average price back up to $608,000 by the end of this summer, more than double the level in Montreal.

While markets should remain stable in most parts of the country if rates begin rising late next year, as most expect, Vancouver’s nosebleed prices could be in for a new decline, Gauthier warns.

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