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Real estate set for slowdown: TD

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Economists at TD Bank say Canada’s real estate market is set for a pullback, led by the country’s two hottest markets, Toronto and Vancouver. A new report from TD predicts resale activity will fall by 15.2 percent and average prices will drop by 10.2 percent over the next two years.

“A combination of more subdued job and household income growth, rising interest rates, the recent tightening in borrowing rules for insured mortgages and fewer first time home buyers are expected to be the chief culprits behind the slowdown,” TD says.

Vancouver’s real estate market will fare the worst in the next two years. TD predicts a 25.4-percent peak-to-trough decline in sales and a 14.8-percent pullback in prices by 2013.

Toronto home prices will fall 11.7 percent by the middle of 2013.

But within the real estate sector, condo prices will fall more sharply than those of single family homes, the report says.

“Increasingly, Canada has become a tale of two markets,” the authors write. “On one hand, there is the multi-residential component, which tends to be more prone to sharp up cycles and down-cycles. This is in contrast to the singles component that is usually less volatile.”

The report highlights the growing trend of investors focusing on the real estate sector in order to offset low returns from interest-bearing assets. But the better-than-market returns on real estate may be coming to an end.

“Looking ahead, the economics in favour of investment properties are likely to become less attractive, particularly in the condo segment,” the authors write.

And while many economists and the Bank of Canada warn that one of the biggest threats to the real estate market is higher interest rates, the economists at TD say other factors should also be seriously considered.

“In our view, a disruption in employment in Canada due to an unanticipated global shock is probably a higher risk scenario than a spike in interest rates at this stage.”

The report by TD comes on the heels of growing concern about the country’s real estate sector. Mark Carney, Governor of the Bank of Canada, recently warned in a speech that certain segments of the country’s real estate market are showing bubble-like characteristics. In Vancouver, the current average home price is almost 11 times the average household income.
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