Lost decade predicted for Canadian housing market as home prices boom is now a bust with future increases to mirror rate of inflation over the next 10 years.
After years of growth, economists say the real estate boom is over and predict Canadian housing prices to flat-line over the next decade.
A TD Economics study, Long-Run Rate of Return for Canadian Home Prices, predicts a "string of lacklustre performances" over the next few years. The annual rate of return for real estate will be about two per cent over the next decade, meaning that prices will simply match the pace of inflation.
Meanwhile, another report warns that a severe economic shock, such as the kind that hit Japan in the early 1990s and California and Nevada in 2006, could knock Canadian housing prices down by 44 per cent. While not predicting the extent or cause of a large-scale house price depreciation in Canada, Moody's Investors Service included the figure in a report on its proposed approach to analyzing the credit risk of non-insured mortgage pools.
"There is some overvaluation in the housing market - home prices have moved away from their underlying economic fundamentals - and that overvaluation has to unwind," said Sonya Gulati, senior economist at TD.
This adjustment, however, will be gradual, she added. "With the U.S., it was a housing market bubble and all of a sudden, a pin came and pricked it. It completely burst. The way you want to think about the Canadian housing market is that there's a balloon that's been inflated but instead of a pin coming and pricking the balloon, the air is going to be slowly let out."
Canadian residential home prices grew by an average of 5.4 per cent a year between 1980 and 2012, climbing about seven per cent per year in the last decade.
The market has cooled over the last six months and will continue its slide over the next few years as tighter mortgage rules, modest economic growth and higher interest rates push prices downward. The economists project a 3.5 per cent annual rate of return on real estate beyond 2015, a low rate that has not been seen since 1980.
Economists say the party is over for large returns on real estate investment in Canada. While residential home prices increased by an average of 5.4 per cent a year between 1980 and 2012, they see annual returns of between two and 3.5 per cent over the next few years.
Photograph by: Ian Lindsay, PNG Files , Financial Post
By Melissa Leong And Barbara Shecter, Financial Post
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