Two well-known economists offered “cautious optimism” at the BILD Economic and Housing Outlook 2011 breakfast in Markham this week.
But Benjamin Tal, senior economist of CIBC World Markets, and Frank Clayton, consulting economist to the Altus Group, warned that the housing market will continue to soften for some time before stabilizing.
“Not everything is rosy in Canada, especially the housing market, and prices are going down,” said Tal. “This will have a significant impact on the economy as a whole.”
He predicted the housing market will continue to slow down over the next six to 12 months, with prices going down another 10 to 11 per cent before conditions stabilize. House values will rise at about the same rate as inflation after that, he said. The current adjustment period will be “painful but necessary.”
The pair also expect interest rates to remain low for at least another year and perhaps for two to three years. “But rates won’t remain low forever,” said Tal. “The current rates are unsustainable
“I doubt we will see interest rates rising in a significant way for 12 months and beyond,” said Tal, saying that today’s consumers are highly sensitive to rising rates, with the most vulnerable being the 35-plus age group with incomes of $50,000 or less. “The mortgage market is not as vulnerable as people think it is.”
He said the number of households with mortgages has fallen, but the amount of mortgages has increased.
Clayton said this year “is looking pretty good, about the same as last year,” but whenever the market weakens, new housing gets hit the hardest. When new home sales are up, resales are down and vice versa. As new home sales have been outperforming resale this year, he expects the opposite next year. He figures there will be 27,500 GTA new housing starts next year, compared to 33,500 this year. (During the “good days” of 2002 to 2008, there were about 41,800 starts a year).
“The condo market has been a lot stronger than I predicted a year ago,” he said. With 80 per cent of the sales in the first eight months of this year in Toronto, “it’s really a Toronto story.”
A number of factors will influence the housing market including employment/income, affordability, demographics, confidence, the lack of purpose-built rental housing, relative price (new versus resale), land use planning and government-imposed costs.
While Toronto has seemed to have been an island in adding jobs, he said, adding that “unfortunately I think this is going to do down.”
Clayton, like Tal, said no housing market collapse will take place, “but we are moderating.”
In the condo market, he said the owner-occupant market is slowing and will certainly be lower next year; investor buyers, who buy to rent out unit, are likely to continue to absorb new units coming on the market as long as they believe they can make money from renting, but there’s not a lot of data on these buyers.
“The investor market is not going to last forever,” Clayton cautioned, as factors like HST and rising costs will affect the rental condo market.
“The condo market is still a question mark in my mind,” he said. “I think we have too much product.”
As far as demographics go, Toronto’s population continues to grow by 100,000 people a year (nearly all immigrants), said Clayton. There is little growth in the 35 to 49 age group, which means little demand for move-up lowrise housing, and while the 50 to 59 age group is growing, they tend to stay put.
“The real growth is the 60- to 69-year-old age group,” said Clayton. “They want to downsize but a lot want ground-related housing or lowrise buildings. I think this is an untapped market for three- to four-storey condos.”
Clayton also predicted that “intensification is here to stay” and the City of Toronto has the potential to accommodate much more housing.
“I hear that low density land supply is constrained, although there is no data on that, but it should help keep the supply of housing under control,” said Clayton.
He predicted that renovation spending (both contracted and cash) will remain reasonably strong this year and next.
Taken From YourHome