We're going through an extraordinary structural change in the global economy, and combined with political uncertainty in Europe and other regions, it has created more volatility in financial markets -- the real estate sector is not immune. Consider it the new normal.
So says Warren Jestin, senior vice-president and chief economist at Scotiabank Group, repeating many remarks he made last December in a keynote speech Wednesday during Scotia Economics' annual "Canadian Real Estate Outlook and Trends Forum" hosted in Toronto.
Global economic growth rates helping Canadian housing
Canada's housing market may be cooling but it remains in fundamentally better shape than many international markets. What's buoying our real estate sector and overall economy? Global economic growth rate projections, with a particular focus on emerging markets, says Jestin.
"We believe this year will be a relatively bad year with growth rates at around eight and a half per cent, much less than what we've seen in recent years and below the 25-year average which is almost 10 per cent," he says of the global economy. "But at the end of the day, the take-home message is that in good years and in bad, the emerging world will out-perform the developed world by a very sizeable margin. That means a lot to Canada as that suggests resource prices, though they may not go up dramatically, will stay profitable and support our resource sector and resource exports."
In terms of the Canadian housing market, and in comparison to our southern neighbours, Jestin notes the U.S. economy is expanding but it's still very much in recovery mode.
"Comparing mortgage delinquencies in the U.S. and in Canada, there is no comparison," he says. "Whether you look at employment, household balance sheets, or a wide variety of other fundamentals, the situation in the household sector is much, much better on this side of the border."
Also noteworthy and in terms of inflation, Jestin says it's going nowhere fast, meaning interest rates are likely to remain low for some time.
"We see the outlook on inflation being relatively benign at least over the next couple of years . . . we don't see it as a policy constraint on the Bank of Canada," he remarks. "As a result, we don't see the Bank of Canada raising interest rates anytime over the next year. In the U.S., the Federal Reserve board chairman has indicated in an unprecedented statement that they expect short-term interest rates to remain where they are now, which is basically zero, to the end of 2014. So interest rates are not an impediment to growth."
Canada's super hot markets
Considering the real estate market in Canada, he adds Vancouver and Toronto are considered the "super-heated ones", but these cities aren't the projected market leaders going forward.
"Regina, Saskatoon, Edmonton, St. John's; you think it might have something to do with commodities?" he asks. "Vancouver is middle-of-the-pack and Toronto is below the national average.
Where is growth best? Well, it's best in the west. "It's a manifestation of the resource story and the increasing influence of the emerging world and how it'll support Canadian growth and prosperity over the next decade," says Jestin.
Sales to remain flat but promising
"I'm fairly encouraged by what we're seeing in the Canadian housing market currently," says Scotiabank senior economist and real estate specialist Adrienne Warren. "Essentially we're looking at sales that have largely levelled out over the last year or so but there's still quite a healthy pace of build inline with the 10-year average. In terms of prices, it's more or less levelling out on a national average basis in the last six months or so."
The outlook for the Canadian housing market in 2012 is "probably more of the same" in terms of sales and pricing growth.
"In general, we're looking at a relatively level pace of activity."
Risks to affordability
But there remains risk to these projections, she adds. If the job market and economy improves more than is presently expected, we could see a boost in housing demand. "The effect of that would be essentially to continue to lift (housing) prices a bit further."
In terms of affordability for housing in Canada, Warren says overall "it's fairly good" but it has probably peaked.
"There's been a little bit of deterioration over the last couple of years as home prices continue to move up, even though interest rates are low, but it's still good from an historical view of affordability," she adds. "Eventually as interest rates move up higher and income levels stay relatively soft, we could see deterioration in the affordability measure, but that's still a couple of years away."
Meanwhile, a report issued by RBC Economics Research finds Canada's housing market made further steps on a promising path in the closing months of 2011 as affordability improved for the second consecutive quarter.
RBC's "Housing Trends and Affordability Report" also states nearly all provinces and major cities saw an improvement in homeownership costs, led by British Columbia and, in particular, the City of Vancouver. Nevertheless, the proportion of a typical Vancouver household's income that would go towards owning a home is still extremely high. RBC says that these tough conditions will continue to be a tall hurdle to clear for local homebuyers.
RBC's housing affordability measure for the benchmark detached bungalow in Canada's largest cities is as follows: Vancouver 86.0 per cent (down 4.6 percentage points from the previous quarter), Toronto 52.2 per cent (down 0.1 percentage points), Montreal 40.1 per cent (down 0.7 percentage points), Ottawa 40.9 per cent (down 0.1 percentage points), Calgary 36.7 per cent (down 0.7 percentage points) and Edmonton 32.8 per cent (down 0.3 percentage points).