Australia's still hot, Canada not so much: Scotiabank

Thursday, 23 December 2010



Global residential property markets experienced a modest but uneven recovery in 2010, supported by ultra-low interest rates and gradually improving economic conditions, according to the latest Global Real Estate Trends report released from Scotia Economics.



Of the 12 advanced nations tracked, the estimated average inflation-adjusted home prices increased this year in six (Australia, Canada, France, Sweden, Switzerland and the U.K.), were flat in two (Germany and the United States) and fell in four (Ireland, Italy, Japan and Spain). In 2009, eight of the 12 markets suffered price declines.



“The rebound lost some steam in the latter half of the year, mirroring the general loss of momentum in global growth, though regional performances remain highly varied,” said Adrienne Warren, Senior Economist, Scotia Economics. “Despite still attractive borrowing costs, the expiry of purchase incentives in many markets, the relatively slow pace of job creation and mounting concerns over the financial strains facing debt-heavy developed nations are weighing on confidence. These factors will likely keep many prospective buyers on the sidelines in 2011.”



Australia’s housing market is the clear front-runner in 2010. Demand is being supported by low unemployment, while tight housing supply is adding to the upward pressure on prices.



Nonetheless, consecutive interest rate increases by the Reserve Bank of Australia (RBA), totaling 175 basis points since October 2009, alongside the expiry of the enhanced First Home Owners Grant in January 2010, have succeeded in cooling its red-hot property market to some degree. Average inflation-adjusted home prices in the third quarter of 2010 were up 9.4 per cent year over year (y/y), compared with a 15.9 per cent y/y increase in Q1.



“We anticipate a further slowing in sales and price appreciation in 2011,” added Warren. “While Australia’s close trade ties with Asia and resource wealth will continue to underpin a solid pace of domestic activity, higher interest rates will worsen already strained affordability. The RBA has recently taken pause, but we expect the resumption of a gradual policy tightening path in 2011, with short-term rates rising an additional 75 basis points by year-end.”



Meanwhile, Canada had one of the better performing housing markets among advanced nations in 2010, though also one of the most volatile. An unusually active winter and spring, prompted by pent-up demand, expectations of rising interest rates that only partially materialized, the looming transition to a Harmonized Sales Tax (HST) in Ontario and British Columbia, and pending changes in lending qualifying criteria, gave way to an unusually soft summer. Over the fall, sales have returned to a more typical, sustainable level.



“We are neither overtly optimistic nor pessimistic regarding the outlook for 2011,” stated Warren. “On the one hand, we expect interest rates to remain at historically low levels, with the Bank of Canada deferring any further rate hikes to late 2011 given an uncertain global economic outlook and subdued inflation, and longer-term borrowing costs drifting up only modestly. This is an extremely powerful inducement for both first-time and move-up buyers and should maintain a decent level of sales.”



Yet, demand will likely be tempered by more moderate employment and income growth as government restraint efforts take hold. Public sector hiring has accounted for fully a third of the net new jobs created in Canada over the past year, a pattern not likely to be repeated next year.

“Overall, we anticipate a fairly lacklustre year for residential housing, with modestly higher sales volumes and flat inflation-adjusted prices,” commented Warren. “The bigger risk likely awaits 2012 when more significant interest rate increases, combined with record high home prices, will notably strain affordability.”