One more year of strength in the housing market

Thanks to Steve Ladurantaye, of the Globe and Mail, for the following article

Globe and Mail Update Published on Tuesday, Dec. 01, 2009 10:10AM EST Last updated on Tuesday, Dec. 01, 2009 7:00PM EST

A recovery in the Canadian housing market, which was “as V-shaped as you can be,” has been based on fundamentals, although TD Economics warns that things could get carried away if the recent enthusiasm continues.

Sales and average prices have recovered from the recession, with each 5-per-cent higher than their previous peak set in late 2007 as of the end of October. Prices had pulled back 12 per cent through the recession.

“Viewing this sharp two-year cycle as a blip is misleading,” the bank's economists wrote in a report Tuesday. “The price adjustment in the downturn was partly warranted by fundamentals, which leaves the current market value in a state of mild over-valuation similar to that of late 2007.”

The economists concluded current prices were not too high, but they did warn that “current market momentum has the potential to lead to significant price overshoot.”

The next year should see the market transition to a more balanced situation, with higher prices drawing more supply. And as houses become more expensive, fewer will be willing to engage in pricey bidding wars.

“By 2011, housing and the overall economy will experience role reversal,” they concluded. “While the economy will strengthen, resale housing market conditions will weaken.”

Addendum from Ross Taylor

The above view of housing prices dovetails with the prevailing view that interest rates have at most one more year at these very low levels. If and when rates rise, this will dampen the enthusiasm of many home buyers.