Soft landing for Canadian real estate, but Vancouver could outperform: report

VANCOUVER - Low interest rates and steady employment growth are underpinning Canadian housing demand, but the market will soften later this year and into 2012, according to Scotiabank Group.

Scotiabank expects sales volumes to edge down modestly in 2011, which places sales 15 per cent below the 2007 peak but in line with the 10-year average.

B.C. housing starts have picked up compared to 2009, but are projected to be flat through 2012, at levels below those of 2006 to 2008. Housing starts are projected to number 28,200 units this year, compared to 39,200 units in 2007.

Further tightening of mortgage lending rules will dampen Canadian real estate activity, as will reduced affordability. Average home prices relative to incomes are at historic highs and affordability will be strained as the cost of borrowing goes up, Scotiabank says.

Additionally, there is a lack of pent-up demand following the decade-long housing boom, and the report says home ownership in Canada is at a "cyclical and structural peak."

While Canadian home values are overvalued based on a number of housing valuation metrics, the risk of a U.S.-style housing collapse is "highly unlikely," the report concludes. And Vancouver is one of the cities that could outperform over the near term, based on factors such as employment and population growth, the ratio of new listings to sales and rental vacancy rates, the report states.