The downside risks to Canada's housing market are increasing, according to a Special Report on Canadian Housing released today by Scotiabank.
Adrienne Warren, senior economist at Scotiabank, said, "Canada's housing market is expected to avoid the sharp downturn witnessed in the U.S. and Europe. However, the downside risks to domestic housing activity are increasing. The full impact of the slowdown may not become fully visible until mid-decade."
According to the report, record prices combined with incremental regulatory tightening are reducing affordability and the housing market's earlier momentum, notwithstanding the lowest borrowing costs on record.
Pent-up demand has been effectively exhausted after a decade-long housing boom, with Canadian home ownership at record levels.
"Average Canadian home prices will eventually decline a cumulative 10% over the next two to three years, as housing demand softens and buyers' market conditions re-emerge for the first time in over a decade," said Warren.
"The correction will be concentrated in the Toronto and Vancouver markets, where supply risks and affordability pressures have the potential to trigger larger price adjustments."
The report also noted that certain market segments are at risk of oversupply, including the expanding condominium markets in several of Canada's largest centres, notably Toronto and Vancouver.
Current high-rise projects are being supported by strong demand. However, the ongoing high level of condominium construction underway combined with an elevated level of unsold units in the pipeline raises the risk of a sharper price correction to any weakening in demand.
