Canadian home values to moderate in the fall: Scotiabank economist

How will global economic uncertainty affect the Canadian economy and real estate market?

These factors have added to the downside risks to the economy, but are unlikely to derail the recovery. Canadians typically take a more cautious attitude toward making a major purchase such as a new home, car or major renovation in periods of greater economic uncertainty and financial market volatility, as we are now experiencing. Rising food and gas prices also are negatively impacting household finances and buying plans.

Do interest rates need to rise in order to stabilize the real estate market?

Despite recent increases in fixed-rate mortgages, borrowing costs are still unusually low. For now, this remains a powerful incentive for homebuyers, supporting both sales and pricing. Eventually, borrowing costs must rise, though the timing and extent of the increases are still uncertain. This will erode affordability and lead to a more significant cooling in the housing market.

How will the Bank of Canada (BoC) be able to raise its key interest rate given the strong loonie, weak export market and faltering U.S. economy?

The Bank of Canada will likely take a very gradual approach to raising interest rates given the challenges facing the domestic economy, including the strong Canadian dollar. But monetary authorities are, nonetheless, committed to raising interest rates back to more "normal" levels as the economic recovery continues and inflationary pressures resurface.

What do you foresee happening in the Canadian real estate market for the rest of 2011?

We anticipate fairly steady housing sales and moderate price increases in most major centres this year, and the return to more balanced conditions between buyers and sellers. Improving job markets are good news for both firsttime and move-up buyers alike, but high home prices and rising mortgage rates will pinch affordability. More affordable property segments such as condos, semi-detached homes and lower-priced single-detached homes will likely be more active than the high end of the market.

What's your regional outlook?

Calgary and Edmonton are staging a strong comeback as resource-related activity heats up again. Both markets are moving away from the strong buyer's territory that characterized 2010, to one that may soon begin to favour sellers. Housing demand and pricing this year will be supported by rising employment and incomes, and population inflows from other parts of the country. Vancouver remains a wild card. Strong interest from foreign investors continues to push prices to ever higher levels. However, the Vancouver real estate market also continues to have the weakest affordability, which is limiting first-time buyer activity.

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