March 1st - 2011

ON THE MARKETS: Canadian resale market to have a soft landing in 2011

Fears of a U.S.-style housing crash in Canada were unfounded and the resale market in this country has landed safely, according to a recent report by TD Economics.

Fears of a U.S.-style housing crash in Canada were unfounded and the resale market in this country has landed safely, according to a recent report by TD Economics.

Although Canada’s resale housing market has had a wild ride in the last three years, the report confirms that the worst-case scenario of a bubble and crash has been sidestepped here.

In­creases in borrowing rates have been delayed, the key development since TD’s previous forecast. This prompted TD to upgrade its 2011 forecast for home sales and average prices. However, its analysts still predict annual sales to be lower than those of 2010.

The average annual resale price for 2011 is expected to remain essentially unchanged, slipping by less than 1 per cent, the bank forecasts. On the flip side, higher borrowing rates remain a possibility, resulting in TD’s prediction that 2012 sales prospects now look weaker than they appeared in September. “With limited pent-up demand, higher sales activity in the near-term will likely take away from sales thereafter. In this context, the annual average price is likely to drop a bit further, by 1 to 2 per cent.” Although rising interest rates are predicted to be the main driver, they are expected to occur against the backdrop of an improving economy, the report states. Along with contained increases in supply, continued modest gains in income and employment should limit the extent of home depreciation.

Better rates, better sales – As of October, TD reports that sales were up a cumulative 13 per cent from July, with a modest increase in average price. “With mortgage rates dropping lower than initially expected, sales found their footing ahead of our September forecast – which had predicted a trough in the second quarter of 2011.” With negotiated rates closer to a historical low of 3.5 per cent, home affordability in the third quarter saw its first im­provement since early 2010 and demand improved.

Interest rates key driver - The ups and downs of the housing market in the past three years confirm the sensitivity of demand to mortgage rates. Although income and em­ployment are also considered, they do not carry the same weight as lending rates. TD’s economists are watching interest rates closely and expect the Bank of Canada’s overnight rate to stay at 1 per cent until the second half of 2011 before reaching 2 per cent by year-end and 3 per cent by the end of 2012. Although higher rates will erode affordability, other factors such as continued income growth are predicted to soften the blow. “Over the next two years, our home affordability measure is expected to range between 30 and 32 per cent of average household income. In historical terms, this is manageable erosion in affordability compared to 40 per cent and higher observed in the late 1980s.”

Stability forecast - First-time homebuyers drove the 2009 housing market rebound, the report states, warning that although home sales may stay elevated for another couple of quarters, they should begin to moderate thereafter. This is because first-time buyers with no built-up equity or capital gains are more sensitive to changes in affordability due to inter­est rate changes. “For potential future first-time buyers, a slight change in borrowing rates can mean the crucial difference between an entry-level purchase and being priced out altogether.”

As sales flatten and begin to slow in 2011, TD expects prices to hit a ceiling over the next few quarters. A softer market balance will likely result in a modest price drop of 3 to 5 per cent in late 2011 and early 2012 before prices stabilize later in the year. A modest market adjustment driven by higher borrowing rates may occur, but an improving economy will cushion it, the report concludes. “The resale market of 2010 was not what bubbles are made of and the next two years will not be what crashes are made of.” To view the full report, visit

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

416-445-9910 ext. 246