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Global Housing Recovery Loses Steam: Scotia Economics

TORONTO, Ontario, August 10, 2010 — The global housing recovery appears to have cooled again after a strong first-quarter performance, according to the latest Global Real Estate Trends report released today from Scotia Economics. Based on available data for the second quarter, housing demand and prices have softened alongside moderating global growth, heightened financial market volatility and sluggish job creation.

"Global real estate markets entered 2010 with a renewed sense of optimism, piggybacking on the broader economic recovery underway," said Adrienne Warren, Senior Economist, Scotia Economics. "Housing demand and pricing improved in the first quarter of the year in the majority of the advanced nations we track, benefitting from ultra-low interest rates, improved affordability, and in some cases, government purchase incentives."

Australia and Canada, with inflation-adjusted average home prices rising at double-digit rates, led the pack, mirroring their relatively more favourable employment and lending conditions. Sweden and Switzerland were posting steady increases, while in the U.K. home prices moved back into positive year-over-year territory for the first time in two years. The U.S. and French property markets were reporting only marginal declines.

There were a few exceptions to this generally improving trend, notably Spain and Ireland. Home prices in both nations were still declining on a year-over-year basis, weighed down by a large oversupply of housing and high unemployment. Japan's property market too shows little sign of emerging from its two-decade long slump.

"The recent slowdown has been most dramatic in Canada," Ms. Warren noted. "Average home prices in Q2 were up just 6.8 per cent year-over-year, compared with 16.6 per cent year-over-year in Q1. Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand.

"Meanwhile, increased listings are tilting overall market conditions back in favour of buyers," continued Ms. Warren. "We expect demand to remain at a lower ebb into next year, and prices on average to be roughly flat."

According to the report, the transition underway in global housing markets from the overvaluation and overbuilding of the mid- to late-2000s is expected to be slow and uneven. In some of the hardest-hit markets facing ongoing deleveraging by households and governments, the U.S., the U.K., Spain and Ireland included, Scotia Economics continues to anticipate a multi-year period of adjustment. In higher growth nations such as Canada and Australia, housing activity should prove much more subdued than in recent years.

Canada's Resale Market Outperforms New Housing

Sellers of resale homes have consistently commanded greater price increases from buyers over the past decade than have new home builders. Between 2000 and the first half of 2010, the average cost of a new home increased by just over 50 per cent. Over the same period, the average price of a resale home more than doubled.

"Sales of new and resale homes are driven by the same underlying factors - primarily interest rates and employment/income growth," said Ms. Warren. "Traditionally, the demand and pricing for new homes mirror, but with a lag, trends in the resale market. When resale housing selection is limited, and/or prices are increasing sharply, buyers are more likely to consider a new home purchase."

The report points to several factors that account for the outperformance of the resale market, including a shortage of resale listings relative to demand, a boom in renovation activity that has added value to the existing stock of housing, and rising urban land values.

Based on national balance sheet data, the aggregate value of Canadians' holdings of residential buildings (i.e. excluding land) has doubled over the past decade. However, the value of the land on which these structures stand has increased two-and-a-half fold. Land values now account for close to 50 per cent of the estimated value of residential properties, up from less than 40 per cent in 1990.

"The divergence in new and resale home prices is seen in most markets across the country, but to varying degrees," concluded Ms. Warren. "The biggest gap has opened up in British Columbia, where the lack of developable land in its largest city is a major contributor to its record high home prices. On the other hand, new home prices have largely tracked resale prices in Alberta and Saskatchewan, where a massive influx of population attracted to the region's booming economy, and the inherent lag in adding sufficient new housing stock, fuelled across-the-board appreciation."

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.