Canada property prices to stabilise

Thursday, May 27, 2010

Canada property prices to stabilise

Growing signs that Canada property prices have peaked is likely to lead to a period of stabilisation, rather than a drastic home price correction, according to a new report released by The Canadian Real Estate Association (CREA).

The CREA believes that Canada home prices will remain stable for some time and avoid U.S.-style residential price correction, despite fears that they are highly overpriced, in relation to earnings across most of Canada.

"The relationship between average price and income has recently been cited as portending a U.S.-style correction in Canadian home prices," said Gregory Klump, chief economist, CREA. "However, such warnings ignore the longer-term relationship between prices and income, and disregard typical Canadian housing market cycle dynamics."

Klump says that Canadian property prices typically move in cycles of boom and stability, and rarely bust. Meanwhile, income generally follows an orderly upward trend over time.

The report refers to the fact that the Canadian home prices remained stable throughout most of the 1990s, while incomes continued rising, making housing more affordable. In more recent years, property prices have increased once more, on the back of cheaper mortgage borrowing costs.

Klump adds: "The Canadian housing market is now widely thought to be at, or very near, the top of a cycle, and the ratio of home prices to incomes is currently high. This ratio will revert to its long-term average as it always does as part of a normal housing market cycle. History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilise, giving incomes a chance to catch up again."


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