Housing Market Forecact for 2006-2007

The housing markets in Canada and the United States have each enjoyed a stellar run during the past several years, but both housing markets are showing signs of cooling. In our base-case scenario, we see the housing markets in both countries slowing gradually, with housing prices stabilizing. However, there are some risks that the housing market could soften more than reflected in our base-case forecast. New and existing home sales reports out of the United States lately show that the number of unsold homes is rising while the months of supply of new homes available for sale has been generally trending higher through 2005. The good news is that supply remains well below levels attained just before the housing market crash in the late 1980s and early 1990s.

The U.S. National Association of Home Builders index of homebuilder optimism has retreated sharply since reaching a cyclical peak of 72 in June 2005.

In Canada, the ratio of sales to new listings for existing homes points to a real estate market that favours sellers over buyers, while renovation spending as a percent of disposable income has soared to new heights, which could be indicative of excessive speculative activity. Most of these measures are currently at levels far less alarming than those found just before the housing market implosion in the late 1980s and early 1990s. However, any delay in the rebalancing of these risks could see levels that have the potential to trigger a sharper-than-expected decline in the housing market.