Housing boom will falter, bank says

The current housing boom is "unsustainable" because prices in 14 of 15 major Canadian markets are above their long-term trends, the Bank of Nova Scotia economics department said in a report Thursday.

With the exception of St. John’s, N.L., price levels have risen above the historic rate of increase over a nine-year boom, the longest since the end of the Second World War.

"There is growing evidence of overvaluation in home prices in some parts of the country," the report said, and "the further domestic home prices climb above underlying economic fundamentals, the greater the risk of an eventual correction."

In nine of the 15 markets, prices are within a few percentage points of the long-term trend. But in six western cities, the increases are in the double digits, ranging from 10 per cent in Winnipeg to 25 per cent in Edmonton.

The bank said the market is still quite good, with little evidence of overbuilding or speculative buying. But the real price gain of 60 per cent over the boom period is high by historic standards, and signs of a slowdown are building.

Housing starts through August are down nine per cent, compared to the same period in 2006, and price increases — 7.7 per cent in July compared to July 2006 —are moderating.

"We continue to anticipate a gradual cooling in both housing demand and price appreciation in the months ahead. Affordability is becoming increasingly stretched for many would-be buyers after almost a decade of rising home prices," the bank said.

It's the second bank report in two days to suggest that the housing boom could be faltering. On
Wednesday, the Royal Bank said housing was becoming less affordable.

CBC News - September 13, 2007