House prices to remain flat: TD

OTTAWA—Canada’s real estate bonanza of the past decade has come to end and the long-term trend as one of the most profitable places to invest also is not encouraging, a new research paper from the TD Bank argues.
The “special report” from one of Canada’s largest banks makes the case that gains in housing prices have been exceptionally strong over the last 10 years—even when accounting for a sharp drop during the 2008-09 recession.

The report does not predict a collapse in house prices as some analysts have suggested. In fact, it sees prices rebounding after a few years of a correction to as high as eight percent.
However, the longer-term trend is for home price gains to average about two percent over the next 10 years—flat once inflation is taken into account, said TD chief economist Craig Alexander.
“I do not think we have a housing bubble in Canada,” said Alexander.
“We have had abnormal strength in the market during a period of low interest rates,” he noted. “And when rates go up over the next three years, you will get a cooling and weaker prices.
The bank says tighter rules for borrowers and lenders are only part of the reason to expect prices to moderate.
Other contributing factors include the aging population, modest growth in both the population and the economy, and, eventually, higher interest rates.
The bank thinks the market could correct by as much as eight percent over the next three years, but Alexander said it is possible that prices won’t fall as much as that.
Some forecasters, including Capital Economists, have predicted a bigger correction is in the offing—arguing that houses in Canada may be over-priced by as much as 25 percent.
But Alexander said that exaggerates the problem, believing the over-valuation is closer to 10 percent.
The problem with the housing collapse scenario, said Alexander, is that typically a sharp correction needs a trigger in terms of a steep increase in interest rates or unemployment—both of which appear unlikely at this point.
Still, the report makes clear that the next decade for housing will be significantly weaker than the previous three.