Global Economic Research
markets among advanced nations in 2010, though
also one of the most volatile. An unusually active
winter and spring, prompted by pent-up demand,
expectations of rising interest rates that only
partially materialized, the looming transition to a
Harmonized Sales Tax (HST) in Ontario and British
Columbia, and pending changes in lending
qualifying criteria, gave way to an unusually soft summer. Over the
fall, sales have returned to a more typical, sustainable level.
Pricing has mirrored demand. Average
inflation-adjusted home price appreciation
swung from a twelve-month gain of 16.6%
y/y in Q1 to a decline of 1.5% y/y in Q3.
More recent monthly data point to a
stabilization, with prices essentially
unchanged in the twelve months to
November. For the year as a whole, real
home prices likely averaged about 5%
above 2009 levels.
We are neither overtly optimistic nor
pessimistic regarding the outlook for 2011.
On the one hand, we expect interest rates to
remain at historically low levels, with the Bank of Canada deferring
any further rate hikes until late 2011 given an uncertain global
economic outlook and subdued inflation, and longerterm
borrowing costs drifting up only modestly. This
is an extremely powerful inducement for both firsttime
and move-up buyers and should maintain a
decent level of sales.
Yet, demand will likely be tempered by more
moderate employment and income growth as
government restraint efforts take hold. Public sector
hiring has accounted for fully a third of the net new
jobs created in Canada over the past year, a pattern
not likely to be repeated next year. Overall, we
anticipate a fairly lacklustre year for residential
housing, with modestly higher sales volumes and
flat inflation-adjusted prices (equivalent to a 2%
increase in nominal terms). The bigger risk likely
awaits 2012 when more significant interest rate
increases, combined with record high home prices,
will notably strain affordability.
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