Housing market will be stable next two years says rbc
February 10, 2011Housing market will be stable nexttwo years: RBCBy Steve LadurantayeGlobe and Mail UpdateStronger economy will balance effect of highermortgage rates in 2011, 2012, bank forecastsA stronger economy will offset the effects of higher mortgage rates and keepCanadian house prices stable over the next two years, according to the RoyalBank of Canada.In a market update that has the bank forecasting price gains of 0.5 per cent in2011 and 1.3 per cent in 2012, economist Robert Hogue said that after twoyears of "gyrating wildly," the Canadian housing market is likely to be amuch less interesting place for the next several years."Going forward, we see nearly perfectly offsetting forces driving Canadashousing market," he said. "On the upside, the economic recovery will gatherstrength in 2011, continuing to boost employment and family incomes. Onthe downside, interest rates are expected to rise."The Bank of Canada will likely raise interest rates by 100 basis points thisyear and another 150 basis points in 2012, he said, making mortgagepayments more expensive for the majority of homeowners. But real grossdomestic product is expected to increase to 3.2 per cent in 2011 from 2.9 percent in 2010."The net effect of these forces is expected to be close to nil, thereby leavingresale activity largely flat," he said.There have been a flurry of forecasts issued in the last week, as the marketstarts the year stronger than expected. Capital Economics issued a cautiousreport that suggested higher interest rates could drive prices down as muchas 25 per cent over the next three years, while the Canadian Real EstateAssociation raised its sales forecast for the next two years as it suggested thata stronger economic recovery and continued low interest rates would keepthe market balanced."Even though mortgage rates are expected to rise later this year, they willstill be within short reach of current levels and remain supportive for housingmarket activity," CREA chief economist Gregory Klump said."Strengthening economic fundamentals will keep the housing market inbalance, which will keep prices stable."Capital Economics economist David Madani said too many optimisticforecasts are based on too short a time frame to be useful, because manymortgages wont reset until rates rise much higher than they are today."Lets balance this discussion a bit and think longer term," he said in a recentinterview. "As far as housing prices are concerned, we think theyreovervalued and we dont see income growth closing that gap."