Real estate rebounds, but no bubble yet: Scotia

The global housing market that plunged the world economy into recession continues to recover, according to a report by Scotia Economics. In fact, the recovery appears to be gaining momentum.

The Global Real Estate Trends report points out policy-makers around the world have chipped in to make the rebound possible, with central banks ensuring low borrowing costs and governments offering direct incentives.

“The pickup in housing activity, even if only modest, is providing much-needed fuel for the global economic recovery,” said Adrienne Warren, senior economist, Scotia Economics. “Housing is a highly cyclical, interest rate sensitive sector, which typically leads the broader economy.

Canada, which rode through the global recession in far better shape than many other major markets, is leading the way out of the real estate downturn.

“Inflation-adjusted average home prices in the July to September period were up 11% from the same quarter a year ago, a dramatic turnaround from the 10% yearly decline recorded in the opening months of 2009, Warren said. “According to the report, available monthly data point to a further strengthening in the final quarter of the year.”

Scotia Economics estimates there were 465,000 homes sold last year, based on data from the Multiple Listing Service (MLS). That marks a 7% increase over 2008. The additional activity helped boost average home prices by 4%, to about $315,000.

Builders contributed to the higher prices as well, by cutting back on new starts, which fell nearly 31% to 146,000. Warren says talk of a new real estate bubble is premature, as the limited supply provides fundamental support.

“We expect housing demand will remain strong through the key spring sales season as buyers attempt to pre-empt the inevitable rise in interest rates, and improving labour markets bolster confidence,” said Warren. “Reduced affordability, through a combination of higher home prices and borrowing costs, will eventually cool demand, though probably not until much later in 2010.”

Markets that were home to some the more outrageous price run-ups leading into the recession — such as the U.S. and U.K. — continue to see falling average house prices, but the rate of decline has eased up.

“A shortage of homes for sale, alongside strengthening housing demand, is contributing to the firming in prices in a number of countries, including Canada, Australia and the U.K.,” said Warren. “New construction essentially ground to a halt at the onset of the global financial crisis in the fall of 2008, and has yet to fully recover.”

(01/11/10)