A recent gloomy forecast from Capital Economics and paralleled by similar reports speculate that housing prices in Canada will drop by 25 percent over the next several years.
This may suggest that Canadian residents consider deferring their new home purchases as prices potentially migrate downward.
In the disturbing forecast by analyst David Madani of Capital Economics released on February 3, 2011, he predicts that housing prices will decline by 25 percent cumulatively over the next few years.
Madani is also suggesting that the effects on real estate investment and spending by consumers may be affected significantly to the point of causing the economy to downturn into a second recession.
It is also argued that the CMHC (Canadian Mortgage Housing Corporation), which has recently changed the mortgage rules for home buyers, could experience future losses based on possible real estate devaluations and affect other viable financial institutions.
In support of this forecast, both The Economist magazine and chief economist David Rosenberg from Gluskin Sheff and Associates have also predicted the same level of decline in real estate housing prices in Canada.
Will Canadian Real Estate Housing Prices Decline in the Future?
Although these forecasts are from highly reputable resources, they do not necessary reflect the consensus of all real estate financial advisors.
Other experts consider that the housing scenario in Canada is quite different from that experienced in the United States over the past few years, although there are some parallel circumstances.
The Canadian Real Estate Association has predicted that housing prices will likely decrease by 1.3 percent in 2011 even though providing four revised projections during the past year.
Although this is far from the 25 percent decline suggested in the above forecasts, it is important to understand that the decline is projected as cumulative over the next few years, even though this phrase is never actually qualified.
For logistical simplicity, if a house valued at $100,000 were to devalue by 4% percent over seven years consecutively, its resulting value would then be approximately $75,000.
At a rate of 7%, it would take about four years and at an extreme of 10%, it would take less than three years for the value to fall to this same level.
There is no way to predict what constitutes a few years in any real estate market. The duration could possibly range from two to seven years and potential buyers should only consider that a possible correction may be forthcoming.
In addition, any potential correction would not only affect existing real estate home values, but the observed frequency of home sales, which would likely also decline.
Evidence for a Possible Decline in Canadian Home Values
The average home price purchase ratio to income has increased significantly from 3.5 to 5.5, meaning that it takes more than five times annual income to purchase an average home. This is considered by many analysts to be unsustainable.
Low interest rates render it easier for purchase and finance a new home with the expectancy and perhaps complacent attitude that interest rates will remain low and thus also mortgage premiums.
The amount of debt incurred by Canadian residents has increased substantially over the recent years due to the availability of low-cost loans.
An increase in prime lending rates by several interest points could dramatically affect the likelihood of repayment and have other economic repercussions as experienced in the U.S. when sub-prime loan default rates began to increase.
Recent changes by the Canadian Federal government reduced the maximum mortgage length from 40 to 35 years and lowered the financing limit to 85 percent of home value from the previous 90 percent.
This may be considered as a possible defensive measure or an unqualified prediction that the market will change.
Results released by the TREB (Toronto Real Estate Board) indicated that home sales for January, 2011 declined by approximately 13 percent with respect to the prior year.
The average home selling price actually increased slightly by about 4 percent respectively. High market prices for homes may not be sustainable if there is a continued decline in sales.
Although no significant change has been observed in the number of homes listed for sale, the average duration between listing and selling has increased by almost 30 percent over the previous year.
In conjunction with this, there may be less incidence of multiple offers and an increased likelihood of underbids being accepted.
Buy a New Home Now or Wait for Real Estate Prices to Drop?
If there is any evidence to support the dim forecasts provided by David Madani of Capital Economics, the Economist magazine and economist David Rosenberg, it should be carefully reviewed and balanced with individual wisdom and strong financial advice.
If the prime lending rate were to rise significantly by several interest points, this could affect the ability of many people seeking an affordable first time home purchase.
This may have dramatic consequences as suggested in the forecasts, but likely only for those that were leveraging their finances heavily and assume that interest rates will remain low.
Those in a stable financial environment, with low debt loads, adequate income and can afford a down payment of 20 percent or more for a home purchase likely have no cause for concern and may benefit by deferring a real estate purchase as prices possibly become lower.
A potential downside to waiting to buy a new home is that even though the purchase price may decrease, interest rates could rise and render mortgages premiums more expensive to manage. Each and all of these factors should be carefully considered by any new home buyer now, and at any time always balanced.
B. James Kudlak, Copyright, All rights reserved worldwide.
