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Realtors' group expects house prices to stop rising as quickly

Blog by Shaun Kimmins | May 27th, 2010

Expect Canadian housing prices to wane slightly in 2011, then stabilize while people's incomes and savings rise enough so they can afford to buy them, the Canadian Real Estate Association said Wednesday.

The prediction by the association's chief economist Gregory Klump comes as banks are beginning to warn of potential declines of up to 10 per cent in housing values to bring prices in line with the incomes of potential buyers.

Klump said in an interview that he compiled the report to counter some of the banks' predictions.

"At this point in the housing-price cycle we're forecasting that prices are going to sag a little bit next year, then stabilize," Klump said.

"And we expect to go through a period where these large price increases are largely behind us, and we expect prices to remain stable as incomes and savings catch up."

A major price correction, Klump said, would require a significant economic trigger, such as the recession that plagued the economy through 2008 and 2009 and resulted in prices dropping sharply.

In 2010, Klump said, enough people will keep buying to support the current high prices.

He predicted the market will enter a "demand-driven downturn," in which prices "stay sticky," but sales fall off because first-time buyers are priced out of the market.

Klump said home prices stagnated during the 1990s while incomes rose, so it shouldn't be surprising that home prices spiked sharply "to make up for periods of little or no price growth."

He added that average prices, particularly in B.C., have been skewed by high-equity buyers such as retiring baby boomers buying up homes at the higher end of the market.

Klump's report, for the association that represents Canada's realtors nationally, comes on the heels of the latest note of concern, a report from CIBC senior economist Benjamin Tal that said average home prices are "overshooting their fair value" during the current market rebound.

Nationally, Tal said that on average, homes are 14-per-cent overpriced. But in B.C., he said prices have overshot their fair value --which would be justified by income growth-- by about 21 per cent.

In an interview, Tal said he doesn't expect prices to correct to the degree that they overshot.

"[Prices] can overshoot and allow fundamentals to catch up," Tal said. "The truth is somewhere in between."

He expects B.C. prices might decline five to 10 per cent, but any deeper correction would require more of an economic trigger.

Klump said CREA's own forecast, which will be released next week, anticipates that nationally, prices will dip about three per cent next year and stabilize.

"From an affordability standpoint it'll be a number of years before first-time buyers are likely to afford their first homes," he said.

Please contact Shaun directly shaun@shaunkimmins.com to discuss whether it's a good time for you to buy or sell and please feel free to comment on this or any of my other Blogs or visit me at my Century 21 In Town Realty website.