Sunday, April 09, 2006

Heated Ottawa Housing Market May Cool, But Not Bust

The odds of a housing price correction are rising, a major bank is warning.

However, the chances that the current seven-year boom will turn to a bust are still low because, while it has run longer than most, the 40 per cent increase in prices is not excessive by historical standards, the run-up in interest rates has been relatively modest and unemployment is low, Scotiabank said in a report Monday.

"From a historical perspective, the duration of the current upswing in home prices is relatively long," said Scotia economist Adrienne Warren, noting that over the past 50 years there have been three other major housing booms, each lasting five to six years. "The magnitude of the current price gain, however, is not out of the ordinary, with the rise in real home prices essentially in line with the average 44 per cent increase recorded over the prior three cycles."

Housing prices still appear to be well supported by economic fundamentals, being driven by tight supply-demand conditions, not investor speculation, the report said. In contrast, during the 1985-to-1989 housing boom, which went bust, price increases were much larger than would otherwise be expected, given overall market fundamentals.

The current housing boom is also more diverse regionally than previous ones, especially the 1980s boom, when average home prices were driven up by a spectacular albeit unsustainable 84 per cent inflation-adjusted surge in Ontario, Warren said. In the current cycle, all regions of the country are contributing to the rise in average house prices, and no province has yet experienced an after-inflation appreciation in excess of 60 per cent.

The current low and stable inflation environment is also reducing the risk of a large price correction, the report said, noting that in only seven of the past 50 years has there been an actual drop in housing prices.

Any drop in inflation-adjusted prices this time will likely occur through a gradual erosion by inflation, rather than a drop in actual prices, it said.

And the housing market may get a demographic lift down the road, as the "baby echo" generation begins to enter the housing market, the report said.

Meanwhile, economic growth and employment prospects are reasonably good, supported by energy-related and productivity-enhancing business spending and multi-year government-sponsored infrastructure projects, it said. Foreign investment is also on the rise, and the housing market is a clear beneficiary.

Unlike the end of past housing booms, there has not been a pronounced run-up in interest rates, as the strong dollar and global competitive pressures have been keeping a lid on inflation for the Bank of Canada, allowing it to leave rates at what are still relatively stimulative levels, the report continued.

Past housing price declines have usually been preceded by a pronounced increase in shorter-term interest rates or a marked deterioration in labour markets, it noted.

While the housing market will likely cool, it's expected to result in a gradually slower pace of price appreciation, Warren said. Regionally, prices will likely remain firmer in the western provinces, supported by their relatively stronger labour markets, tighter housing markets and a continuing influx of people from other provinces.


Post a Comment

<< Home