Real estate market correction coming

Toronto's real estate market is overdue for a “moderate correction” according to the TD Bank which is predicting home prices should slip 10 to 15%.

“The excessive pricing of Canadian housing in relation to fundamentals is now clearly correcting,” says TD Bank economist Grant Bishop. “We expect a moderate correction in prices over the coming year.”

The TD bank is predicting a “downward correction of 10 per cent in monthly average prices, followed by several years of stagnation of price growth,” especially since many Canadian families have large debts which is hampering their ability to borrow more.

Other Canadian economists also believe the Canadian real estate market is overvalued, with estimates varying between 25% and 40%. The Canadian Real Estate Association (CREA) downgraded their estimates in August as sharp declines in home sales made it clear it was becoming a bear market (a bear market means buyers are hibernating and waiting it out).

Seasonally adjusted national home sales were down 6.8% in July compared with June. On a year-over-year basis, Canada's sales activity was down by 30% compared with July 2009. Home sales have declined for three months in a row.

“The market went up faster than most people have expected and it’s going down more quickly than we had anticipated,” says Sal Guatieri, a BMO Capital Markets senior economist.

The average price of homes sold in July was $330,351, only 1% higher than a year earlier. If more potential buyers hold back prices might begin to dip, sparking a price drop as the market recorrects itself.

“The combination of tighter mortgage insurance rules, a modest back up in borrowing costs, and the HST have delivered a hammer blow to sales,” says Doug Porter, deputy chief economist for BMO Capital Markets.

CREA is warning there will be more dismal sales numbers in the future.