Real Talk!

Warren Lovely, an economist at CIBC World Markets Inc., recently interviewed for a Globe & Mail article, said Ontario's is one of the provincial economies downshifting from a better-than-expected 2010 to a more tepid growth pace for 2011. Mr. Lovely says the housing market has been propping up Ontario's economy, but the same sector will likely act as a drag next year. A slowdown in the construction sector, combined with a slumping U.S. economy, will weigh on real estate and the overall economy. He estimates that real estate prices in Ontario are over-valued by about 11.6 per cent.

Nesbitt Burns has a similar perspective. A recent online article (TorontoLife.com) discussed a study: "In our view, comparing house prices with personal income, rather than rent, provides a superior methodology… the historical trend for this ratio has a zero slope, meaning prices tend to rise alongside incomes over time. This makes sense, since a family’s income largely determines how much it can pay for a house…

Comparing the current ratio with the long-term trend suggests Canadian house prices hit a peak overvaluation of 18% in late 2009. This raises some concern because it suggests the market is only slightly less overpriced than in the late 1980s, or compared with the U.S. in 2006. However, a 3% decline in (seasonally-adjusted) prices so far this year, coupled with continued moderate income growth, has reduced the estimated degree of overvaluation to a less worrisome 11% in 2010 Q3."

It never fails to amaze me that the Toronto/Ottawa real estate markets can be so different. Recently, a capital Conference Board economist said that October stats showed Ottawa in the middle of expected price increases nationally at about three per cent. Robin Wiebe said that government employment has always helped the market stay steady, but the early 2000s tech-boom pushed residential real-estate into a better growth phase that still reverberates today. "We are looking at a period of stability out here," Mr. Wiebe added.

Canada’s residential property sector appears to be stabilizing based on separate reports released in mid-November. National resale housing activity picked up for the third straight month in October, according to data from the Canadian Real Estate Association. The association also predicts that residential property prices in Canada are set to fall 1.3% in 2011 after a rise of 3.1% this year.

“High employment levels and low mortgage rates will continue to support demand for new homes in 2011. Nevertheless,housing starts will decrease to levels that are more in-line with long-term demographic fundamentals next year,” said CMHC chief economist Bob Dugan. CREA president Georges Pahud. ‘Interest rates are expected to resume their return to more
normal levels next year, but will still be at levels that are friendly to the housing market,’ he said.

Meantime, Statistics Canada said Tuesday that the gross domestic product rose by only 0.3 per cent in the third quarter,down from a 0.6 per cent gain in the previous quarter. The agency said lower exports and lower investment in housing restrained GDP growth.

Douglas Porter, the Bank of Montreal's deputy chief economist, said it means the Bank of Canada will be in no rush to raise interest rates when it makes its next scheduled announcement. The central bank increased borrowing costs three times between June and September, but has since held rates steady at 1 per cent. It is set to make its next decision on Dec. 7.

UPDATE:

This just in:

Royal Bank of Canada says the cost of home ownership was more affordable in the third quarter, thanks to lower mortgage rates and softer house prices.

RBC says all provinces had improvements in housing affordability during the third quarter, especially British Columbia.

The RBC report says housing affordability improved at the national level by between 1.4 and 2.5 percentage points, depending on the type of property.