RBC offers resale market outlook

After gyrating wildly since 2008, Canada’s housing market is now expected to display greater stability going forward. The evolution in the past two years was shaped by truly ex- ceptional events and factors: a global financial crisis, a major recession that destroyed nearly 430,000 jobs in Canada, cuts in policy interest rates to the lowest levels of our generation, the introduction of a harmonized sales tax (HST) in Ontario and British Columbia (and a rate increase in the HST in Nova Scotia), and two rounds of mortgage rule tightening. These phenomena generated similarly exceptional movements on the part of home buyers and sell- ers—from a mass exodus from the market in late 2008 to a crowded return into it in 2009, and then to a stepping back to the sidelines again in the first half of 2010. Since reaching their most recent lows this past summer, home resales have picked up again, although to levels that still remain well below recent peaks.

With the economy (both global and national) on a more solid footing now, the road ahead will be less bumpy. However, we may not be quite home-free yet. On January 17, Finance Minister Jim Flaherty announced a third round of mortgage rule tightening – which will, among other things, reduce from 35 to 30 years the amortization period permissible for gov- ernment-back insured mortgages (see our commentary Canada’s mortgage rule to tighten published January 17) – that is likely to generate some volatility in the coming months but on a much smaller scale than the wild swings of the last two years. In our opinion, the Ca- nadian housing market is on path towards mostly flat levels of resale activity and minimal price increases this year and next. We assume that the upcoming mortgage rule changes (effective in March in the case of the shortening in the amortization period) will bring for- ward some sales that would have occurred later in the year and their overall impact on hous- ing demand for the year, at the margin, will be negative.

Going forward, we see nearly perfectly offsetting forces driving Canada’s housing market. On the upside, the economic recovery will gather strength in 2011 (real GDP is forecasted to accelerate to 3.2% from 2.9% in 2010) thereby continuing to boost employment and family incomes. On the downside, interest rates are expected to rise—with the Bank of Canada re- suming its rate hiking campaign around spring time, adding 100 basis points to the overnight rate by the end of this year and a further 150 basis points next year)—which will raise the cost of homeownership. The net effect of these forces is expected to be close to nil, thereby leaving resale activity largely flat. In this context, the upcoming changes to the mortgage rules, having a minimal negative effect overall, are likely to tip the scale toward a marginal decline in resale activity this year. We, therefore, project a small 0.2% decline in Canadian home resales in 2011 to 446,200 units following a more meaningful 3.9% drop to 447,000 units in 2010. Growth in resale activity is forecasted to turn slightly positive in 2012 (at 0.3% to 447,700 units).

Home prices (on an annual average basis) are forecasted to rise in all provinces but at a very slow pace in most cases in 2011. Substantial gains in 2010 propelled property values to historically elevated levels across Canada, and with the balanced market conditions expected to prevail throughout this year, this will leave little room for any further significant increases being sustained in 2011.