TORONTO, Sept. 11, 2013 /CNW/ - Aggressive monetary policy easing, which has anchored short-term interest rates near historic lows, has combined with pent-up demand to reinvigorate global property markets, according to the Scotiabank Global Real Estate Trends Report released today.
"Despite the sluggish pace of economic activity and elevated financial market volatility, inflation-adjusted home prices strengthened year-over-year (y/y) in the second quarter in the majority of countries we survey," said Adrienne Warren, Senior Economist at Scotiabank.
According to the report, the first-half 2013 improvement is most notable in a number of advanced nations such as the U.S. and the U.K., but prices are re-accelerating again in some emerging markets as well, including China.
The report also indicates that Canadian housing activity remains buoyant, though the underlying fundamentals for continued gains are becoming less favourable. Housing affordability at a national level is still within historical norms. However, it's expected to become a bigger challenge for buyers over the coming year with interest rates now drifting up. Home prices also are proving resilient.
"Potential overbuilding of condominiums in a number of major urban centres remains a concern, especially in light of recent evidence that demand is ebbing," added Ms. Warren. "In Toronto, where reasonably good data on new home sales are available, purchases of both new low-rise and high-rise homes have fallen sharply over the past year. Sales of resale condominiums are holding up better, evidence that demand by owner occupiers remains healthy."
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Modest Firming In Global Housing Markets Through Mid-Year
Aggressive monetary policy easing, which has anchored short-term interest rates in many countries near historic lows, alongside pent-up demand are helping to reinvigorate global property markets. Notwithstanding the sluggish pace of economic activity and elevated financial market volatility, inflation-adjusted home prices strengthened year-over-year in the second quarter in the majority of countries in our survey. The turnaround is most notable in a number of advanced nations such as the United States and the United Kingdom, but prices are re-accelerating again in some emerging markets as well, including China.
The United States maintains its position near the top of our international ranking, with inflation-adjusted home prices rising 8% y/y in Q2. Demand is being bolstered by moderate job growth and near record housing affordability, while low inventories and fewer distressed sales are supporting prices. We expect rising mortgage rates will moderate, but not derail the recovery, which is still in its early stages from a cyclical standpoint. Household finances have improved, consumer confidence is rising and lending conditions are slowly easing. There is also considerable pent-up demand for housing following the multi-year downturn.
Canadian housing activity remains buoyant, though the underlying fundamentals for continued gains are becoming less favourable. Average inflation-adjusted home prices increased 2½% y/y in Q2 alongside strengthening sales volumes. Low borrowing costs and balanced market conditions continue to attract buyers, though slowing job growth and the recent uptick in fixed mortgage rates will likely cool activity later in the year and into 2014. Affordability also is challenged in some of Canada's largest urban centres, primarily for single-family homes.
A number of European property markets are showing early signs of revival, mirroring the nascent pickup in economic activity and consumer confidence. The U.K. housing recovery is becoming more broad based, supported by 'Help to Buy' stimulus measures introduced in the 2013 budget. Real prices moved back above year-ago levels in Q2 for the first time in 2½ years. Sweden and Switzerland reported steady real price growth in the second quarter.
Conditions are weaker in the periphery. Spain's property market remains in a deep slump. While the rate of price decline is slowing, there is limited prospect of a near-term turnaround with the nation's jobless rate stuck at over 25%. Irish property prices appear to be bottoming as demand slowly picks up. However, record mortgage arrears topping 12% of outstanding loans are a significant hurdle to a sustainable housing recovery.
Asian property markets are for the most part holding up in the face of slowing regional growth. Despite official policy efforts in recent years to rein in credit demand, real house prices accelerated in the vast majority of major cities in China in Q2. Australian, Indonesian and Thai property markets also gained momentum in the April to June period, though conditions remain weak in India and South Korea, with prices contracting modestly last quarter.
Latin American property markets are mixed, with strong price growth in Chile, Peru and Colombia underpinned by relatively solid domestic demand and labour markets. Real house prices in Mexico are flat, with modest nominal price appreciation eroded by persistent inflation. Meanwhile, a weakening economy and high interest rates have led to a sharp cooling in Brazil's previously red-hot housing market.
Focus on Canada's Housing Market
Canadian housing activity remains quite buoyant, supported by low borrowing costs and reasonably healthy employment conditions. Home resales, after declining through the latter half of 2012, recovered over the spring and summer. The volatile pattern of sales may reflect in part uncertainty surrounding repeated moves by Ottawa to tighten mortgage rules and lending guidelines in order to slow the housing market's momentum. Year-to-date, national home sales are trending slightly below last year's levels, and are in line with the average pace of the past decade.
Home prices also are proving resilient. The MLS Home Price Index (HPI), which takes into account changes in the mix of sales by housing type and location, shows national prices tracking around 2-3% year-over-year. This modest rate of house price appreciation is consistent with balanced market conditions and long-term house price inflation.
Regionally, Alberta continues to show the strongest overall conditions, as strong population inflows and full-time job growth fuel growing housing demand. Activity in British Columbia remains on the softer side despite some recovery in sales and pricing in recent months. In most other provinces, sales volumes are fairly 'typical' and market conditions balanced.
Buyers are taking advantage of still attractive borrowing costs, notwithstanding the recent upward drift in fixed mortgage rates. Indeed, the prospect of rate increases may have drawn in potential homeowners from the sidelines. Demand also is supported by immigration and population growth, and mirrors strengthening consumer confidence.
New home construction and building permit demand have also firmed in recent months. However, the 183,000 annualized housing units initiated this year is well below last year's 215,000 units, and in line with underlying household formation requirements. The reduction in starts has been focused on multi-unit projects, primarily in Toronto and Montreal, as builders react to reduced new home demand and rising unsold inventory.
Underlying fundamentals are less conducive to a further ramping up in housing activity. Any pent-up demand from last year's slowdown has been satisfied with sales now back in line with historical averages. Moderating job growth — employment gains have averaged 13,000 per month this year, half the average gain in 2012 — also should temper demand.
Canadian households appear increasingly reluctant to take on additional debt, heading to repeated warnings from policymakers. Consumer credit and mortgage growth is advancing at its slowest pace in over a decade. The household savings rate is trending up.
Housing affordability at a national level is still within historical norms, with high home prices offset by ultra-low borrowing costs. However, affordability is expected to become a bigger challenge for buyers over the coming year with interest rates now drifting up. The deterioration in affordability should be manageable under a gradual upward trajectory for interest rates, moderate income growth and modest to flat home price increases. A sharp spike in interest rates, a decline in household incomes or a re-acceleration in home price appreciation pose a greater risk. National affordability measures mask more strained conditions in several major centres, primarily for single-family homes in Toronto and Vancouver.
Homeowners have a number of options in the face of rising borrowing costs. Variable rate mortgages are expected to remain near historic lows in 2014, and move up only slowly thereafter as the Bank of Canada gradually normalizes monetary policy. Many homebuyers are insulating themselves to a higher rate environment by locking in at historically low rates. For homeowners with a mortgage coming up for renewal, most face a lower rate today relative to the discounted rate available 1, 3 and 5 years ago.
The combination of moderately higher interest rates and slowing job growth will likely dampen home sales later this year and into 2014. Meanwhile, increased supply should limit price gains. However, the risk of a large price correction nationally remains low barring a major adverse shock such as a sharp rise in unemployment. Sellers have been responsive to shifts in supply conditions, mortgage quality is solid, and arrears rates are low and edging lower.
Slowing home sales should in turn lead to a reduction in new home construction. We expect starts will fall to about 170,000 units in 2014, below demographic replacement demand. A period of below-average construction will help absorb excess housing stock. Unsold inventory has been creeping up in recent years with starts exceeding household formation trends, but is not particularly high from a historical perspective.
Canada's Major Condo Markets Are Rebalancing
Potential overbuilding of condominiums in a number of major urban centres remains a concern, especially in light of recent evidence that demand is waning. In Toronto, where reasonably good data on new home sales are available, purchases of both new low-rise and high-rise homes have fallen sharply over the past year. Reduced expected returns have dampened investor demand for new condos, while high prices and supply constraints have undercut low-rise sales. Sales of resale condominiums are holding up better, evidence that demand by owner occupiers (which dominate resales) remains healthy.
Homebuilders are responding to the shift in market conditions. Toronto housing starts dropped from a record 48,000 units last year to a 33,000 annual rate over the first eight months of 2013. Based on annual household formation of close to 38,000 from 2006-2011, starts have moved back below underlying housing demand.
The slowdown primarily reflects fewer high-rise projects breaking ground. Toronto apartment starts have fallen almost in half this year, from 30,000 units in 2012 to an annual rate of 16,000 from January through July. Given the weakening trend in new home sales, construction will likely move even lower over the coming year. Toronto apartment starts fell to an annual rate of 13,000 in 2009-2010 following the recession slump in sales.
Despite the slowdown in starts, a record number of completed condominium units will come onto the Toronto market over the next two years. Given strong condominium rental demand — lease transactions reached a record high in Q2 — low vacancy rates and rising rents, we expect a large number of investor-owned units can be absorbed by the rental market. Even so, new supply will likely outstrip demand, putting some downward pressure on new and resale condominium prices.
There are also potential imbalances emerging in the Montreal and Vancouver condominium markets. Here too builders are slowing the pace of new construction in order to reduce inventories — apartment starts this year are down roughly 30% and 10%, respectively. Data on new condominium sales for these markets are limited, though resale reports point to somewhat softer conditions.
Over the medium term, a number of factors will continue to support homeownership condominium demand. These include the high cost of single-family homes in Canada's largest urban centres, lifestyle considerations (e.g. the desire for shorter commutes and lower maintenance) and demographic shifts (e.g. immigration, an aging population and the rise in one-person households). From a supply perspective, development restrictions and land constraints are expected to continue to promote urban intensification.
For further information:
Adrienne Warren, Scotiabank Economics, at (416) 866-4315, or firstname.lastname@example.org; or
Joe Konecny, Scotiabank Media Communications, at (416) 933-1795, or email@example.com.
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