Canadian home price growth to slow in 2016, TD forecasts

slow-down

Photo: Tristan Schmurr/Flickr

Low interest rates should help propel the Canadian housing market to a record-breaking 2015, but by the year’s end the impact of the low rate environment will diminish, according to a new TD Economics report.

The Regional Housing Report from TD published Monday forecasts this to play out on a national level with home prices finishing the year having increased by seven per cent this year and dropping to one per cent in 2016.

In addition to the Bank of Canada’s overnight interest rate cuts in January and July, TD identified the five-year fixed mortgage rate, which dropped by 55 basis points from January to April, as having a positive effect on the housing market this year.

“The low rate environment has helped to keep key markets in Toronto, Vancouver, Hamilton and Victoria humming, with both homes sales and price growth running near a double-digit pace,” the report’s author, economist Diana Petramala, said.

TD also noted that a 40 to 60 basis point reduction in mortgage rates can improve sales by up to 15 per cent in the following half-year period.

After that, however, rate-spurred sales tend to dissipate — and that’s what TD is predicting for Canada.

After the increase in home sales triggered by recent rate cuts runs its course in late fall, “it is hard to point to a catalyst for a further acceleration in regional housing market activity,” the report said.

In the sizzling Ontario and BC markets led by strong sales in Toronto and Vancouver, respectively, home-price growth is expected to weaken, too, but not to the national rate.

TD is expecting average home prices to finish up the year in the eight to 10 per cent range, followed by a three to five per cent increase over next year. Due to price overvaluation, however, TD said these markets are “vulnerable to the adverse impact of an unanticipated shock to either interest rates or the unemployment rate.”

This sentiment echoes a report from BMO published last week.

“A sharp increase in unemployment or interest rates that erodes demand could lead to a glut of unsold homes, driving construction and prices lower,” BMO senior economist Sal Guatieri wrote.

With numbers released today from Statistics Canada confirming Canada entered a recession over this year’s first half, whether potential homebuyers will be spooked enough to make a noticeable dent in sales for the rest of the year remains to be seen.

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