House prices will fall in 2011, TD Bank said Wednesday as it revised its outlook for the Canadian real estate sector.
The bank left its forecast in place for 2010, saying there should be about 475,000 transactions at an average price of $350,000. That’s a 9-per-cent increase compared to the end of 2009.
“However, this hides an underlying shift occurring over the course of the year,” said TD Bank economist Pascal Gauthier. “While we anticipated sales and prices to be strong in the first half and to cool in the second half, we now expect this contrast between the two halves will be sharper.”
While income and employment seems to be recovering quickly from the recession, the number of listings to hit the market and the number of new housing starts has caught the bank by surprise. It had previously expected prices to gain 1.6 per cent in 2011 in inflation adjusted terms, the bank now is calling for a 2.7-per-cent drop.
Ontario and British Columbia are expected to bear the brunt of the decline, seeing their markets drop 3.4 per cent and 3 per cent respectively.
“As a result of the stronger supply response, the market balance is now expected to be somewhat softer next year, consistent with market conditions more favourable to potential buyers and a mild depreciation in home values,” he said. “Taking into account the typical lags between home affordability, sales and price behaviour, the impact of all these combined changes is that we now project a modest price pullback for 2011.”
The forecast is slightly more pessimistic than that put forward by the Canadian Real Estate Association, which has said since the beginning of the year that prices would like fall by 1.5 per cent in 2011 as more supply enters the market and rising values price many would-be owners out of the market.
On Tuesday, Brookfield Real Estate Services chief executive officer Phil Soper told the company’s annual general meeting that CREA’s forecast is likely out of date, and the market will be notably softer in 2011. The company owns Royal LePage and Le Capitale.
“It’s likely too conservative, but they have the direction right,” he said. “Affordability is eroding in Canada, and higher prices and more expensive mortgages will push people out of the market quite quickly.”
NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS
The Bank of Canada is very clear about its intention to raise rates as early as June. The key question is not about timing but rather of magnitude. At this point, it appears that the market is in a process of pricing in a significant rate increase by the Bank, with many observers suggesting that the Bank rate will reach 4% or 5% by the end of 2011. It appears that the Bank of Canada itself is uncomfortable with this recent move by the market to discount an aggressive tightening program. The Bank knows very well that this recovery is going to be extremely non-linear with an array of factors limiting growth and inflation in the second half of the year and into 2011. These factors include a strong dollar, the end of fiscal stimulus, a significant softening in real estate activity following this spring, a slower pace of economic activity in the US in the second half, and the impact of higher interest rates on over-extended consumers. In fact, our consumer capability index is at a 15-year low and we estimate that consumers are now 40% more sensitive to higher rates compared to the last times the Bank of Canada raised interest rates. This environment is consistent with a gradual approach towards removing liquidity from the market with the Bank rate likely to rise to only 2.5%-3.0% by the end of 2011.
What does the coming rate hikes mean for the stock market? The common thinking is that higher rates are negative for stocks, but history does not support this claim. Looking at data going back to the 1950s we found that in the six months before the Bank started to lean into the wind, Canadian stocks historically provided, on average, a 22% annualized return (dividends plus capital gains) measured by the total return index for the TSX Composite. In the six months after a rate trough, Canadian stocks in comparison returned 8.3% in annualized terms. That’s less, on average, than in the pre-hike period, but within a per cent of the TSX’s longer term performance. Total returns were significantly negative in only one of the thirteen half-year periods after a rate trough. Stocks outshone bonds, the main competing asset class, about 70% of the time in the half year before the trough in rates and over 85% of the time in the half year after.
Along with the expected limited monetary tightening, this historical observation suggests that the coming rate hikes may well be an annoyance but are unlikely to deliver a knockout blow to equity markets.
With 27 years of direct mortgage lending experience, first with a major bank, then a local credit union and now as a Mortgage Broker, I have arranged mortgages on almost every type of property imaginable....even a 50+ ft fishing trawler!!