One Canadian economist declared that Canada's "housing market boom is officially over," while another said, "After many false calls, there is now convincing evidence that Canada's housing market has come off the boil." But two recent reports say that while the market is no longer sustaining its record-breaking pace of the last several years, it is still healthy.

After a housing boom that lasted almost 10 years, Canada Mortgage and Housing Corp. says MLS sales will drop by 8.5 per cent in 2008 compared to last year, and will see another 2.3 per cent decrease in 2009. A recent report by Scotiabank predicts that sales volumes will drop to 15 per cent below last year's record levels.

However, both the CMHC and Scotiabank reports predict that average house prices will continue to rise.

"Despite a slowdown of MLS sales and a general ease on the market, demand remains strong by historical standards," says CMHC. "For 2008 and 2009, growth in the MLS average price will remain above inflation. Prices will reach $323,000 (+5.1 per cent) in 2008 and $333,000 (+3.3 per cent) in 2009. Given the strong sellers' market that prevailed in most regions in recent years, the MLS average price will have doubled between 2000 and 2009."

Scotiabank's forecast also predicts a five per cent increase in prices this year. It says that despite the slowdown, "among highly sought-after properties, reports of bidding wars are not uncommon … however, the softening in housing demand and price appreciation is consistent with usual late-cycle developments: reduced affordability, limited pent-up demand and increased supply."

The number of new listings on the MLS in Canada's major markets reached its highest level ever in April, the Canadian Real Estate Association reports. The association's chief economist, Gregory Klump, says, "New listings are forecast to rise further as sales activity continues retreating from the peak last year, resulting in an increasingly balanced resale housing market and smaller home price increases."

Affordability is the key reason why formerly hot markets in Western Canada have cooled off. In Central Canada, slow growth in the U.S. economy and the strong Canadian dollar have hurt the manufacturing and exporting sectors.

However, CMHC says the underlying fundamentals that fuel the housing market are still strong. The federal housing agency says mortgage interest rates will be in the 6.75 to seven per cent range, while the five-year rate will be in the 6.75 to 7.25 per cent range -- still low by historic standards. Employment in Canada grew at a strong pace last year, and while job creation will slow down, it is still at high levels. Immigration to Canada also remains historically high, which will continue to stimulate housing demand.

The Scotiabank report took a look at what happened following housing booms in the periods from 1977 to 1984 and from 1990 to 1998. "Looking at a number of important benchmarks, we believe the current cycle has less downside risk, as it appears to be built on a stronger economic foundation than those of the 1970s and 1980s," says the report. It cites five reasons why the risk of a "major correction" in the housing market is low.

First, it says home prices are not substantially overvalued, noting that a recent report from the International Monetary Fund "placed Canada at the bottom rungs of international home price overvaluation."

The report also says there is "little evidence of widespread speculative home buying that often accompanies the late stages of a housing boom. Rather, real price trends remain largely consistent with short-term supply-demand dynamics (measured by the ratio of sales-to-new listings), with the tightest regional markets witnessing the biggest price gains."

It says the real estate market is not overbuilt, due to a cautious approach among builders.

Scotiabank suggests that households are not "overleveraged" and "home equity as a share of real estate assets is near record highs, with price appreciation outpacing the rise in mortgage obligations. Mortgage carrying costs as a share of disposable incomes are historically low, despite rising home prices."

Finally, the report says that unlike the situation in the U.S., Canadian mortgage quality is sound. Despite introducing new products such as interest-only and 40-year mortgages, it says Canadian lenders have "maintained conservative loan qualifying criteria."

"Canada does not have ultra-low teaser rate mortgages that have contributed heavily to U.S. defaults as they reset. Adjustable-rate mortgages, sub-prime lending, borrowing against home equity, and insured investor mortgages all account for a much smaller share of the Canadian mortgage market than in the United States."

While predicting that Canada's market is in for a soft landing, Scotiabank says a "deeper and more protracted downturn in the U.S. economy" could pose additional downside risks.

Published: May 27, 2008

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Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He is also consulting editor of Homes & Cottages, Canada's largest building and renovation magazine. Email jimhc@pathcom.com.