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Global Real Estate Activity Wanes as Economic Uncertainty Grows

TORONTO, Ontario, June 09, 2011 — After some encouraging signs of revival last year, residential real estate markets in much of the developed world are losing momentum — or in some cases, even reversing course, according to the latest Global Real Estate Trends report released today by Scotia Economics.

"Increasing nervousness over global economic prospects alongside rising food and gas prices and persistently high unemployment are keeping potential buyers on the sidelines despite highly accommodative monetary policy," said Adrienne Warren, Senior Economist and Real Estate Specialist, Scotia Economics. "A lingering oversupply of housing and/or still tight credit conditions are reinforcing the downward pressure on sales and prices in a number of markets globally."

"A marked improvement in housing affordability, particularly in those regions suffering large valuation declines in recent years, will eventually put a firmer floor under prices and underpin a gradual turnaround for the sector," added Ms. Warren. "For the time being, however, the process of repairing bloated public and household balance sheets points to a protracted period of subpar economic growth among debt-heavy developed nations that will restrain household borrowing and spending. A generally more cautious lending environment also will hold back the pace of recovery."

Australia's seemingly impermeable housing boom has languished in recent months. While benefitting from strong economic growth and low unemployment, record high home prices alongside a series of interest rate increases by the Reserve Bank of Australia (RBA) are eroding the nation's already highly strained affordability. Average home prices in Q1 were unchanged from a year earlier, and down 3.5 per cent adjusted for inflation. While the RBA has put further rate hikes on hold for now, the eventual resumption of monetary tightening will reinforce the more muted housing outlook.

Canada reported positive real price appreciation in the first quarter of 2011, with average inflation-adjusted home prices up five per cent year over year (y/y) in Q1. The national average, however, is skewed by strong sales, including by foreign buyers, of high-priced properties in the Greater Vancouver Area. Excluding Vancouver, average real prices were up just one per cent y/y in Q1, consistent with a more balanced national market.

"Housing sales in Canada, while below the record-setting pace seen at the height of the boom in 2005-2007, are being supported by steady job creation and still attractive borrowing costs," stated Ms. Warren. "Relatively tight supply is adding to price pressures in several cities. Nonetheless, high home prices, the further tightening in mortgage insurance rules effective mid-March, and the upward drift in fixed mortgage rates this year appear to have slowed demand somewhat, most notably among first-time buyers. We anticipate relatively flat sales volumes and average prices through the latter half of the year."

Turning to Europe, U.K. real estate markets also took a step back in early 2011 following a short-lived recovery last year. Average inflation-adjusted home prices were down four per cent y/y in Q1. Notwithstanding ultra low borrowing costs, recent tax breaks for home buyers and an easing in lending conditions, aggressive fiscal austerity measures and persistently high unemployment will continue to depress activity in the near-term.

Spain's three-year and counting housing slump shows no sign of letting up. Following steep price declines from 2008-2010, average inflation-adjusted home prices were down more than eight per cent y/y in Q1. Prices are likely to fall further in the coming year given a massive glut of unsold homes, soaring double-digit unemployment, the elimination of mortgage funding for low income families at the beginning of 2011 and a dearth of foreign vacation property buyers. Average home prices were also still declining in Italy as of the end of 2010.

Not all residential property markets are in negative territory, as the housing recovery continues in some of Europe's better performing economies. In France, average real prices were up seven per cent y/y in Q1, though weakening global growth expectations may limit further price gains in the near-term. In Germany, for which only annual price data are available, real home prices increased in 2010 for first time in over a decade. Demand and pricing have firmed alongside a strong economy, rising exports and the lowest unemployment rate in three decades. Nonetheless, Germany's declining population will limit the extent of sustainable price appreciation in coming years.

Switzerland reported steady real price increases averaging four per cent y/y through Q1, while prices in Sweden were unchanged from a year earlier. Irish property prices rebounded sharply — and unexpectedly — in the latter half of 2010, albeit following double-digit declines in both 2008 and 2009. With the Irish economy still marred in recession, and facing an oversupply of housing, the recent upturn will likely prove temporary despite the best housing affordability in a decade.

Stateside, U.S. real estate markets have softened again after some encouraging signs of bottoming last year. Average inflation-adjusted home prices were down five per cent y/y in Q1. High unemployment and tight credit availability are restraining demand, while a large volume of distressed properties is adding to the downward pressure on prices.

"The modest pickup in sales in the U.S. over the past six months has been primarily of investor-driven foreclosed properties, with little evidence of broader homebuyer activity since the expiry of purchase incentives in early 2010," commented Ms. Warren. "Despite gradually improving job markets and near record housing affordability, the expected addition of at least another one million foreclosed properties to the market this year suggests more downside price risk in 2011."

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.

News source: Scotiabank


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