A stronger economy will offset the effects of higher mortgage rates and keep Canadian house prices stable over the next two years, according to the Royal Bank of Canada.
In a market update that has the bank forecasting price gains of 0.5 percent in 2011 and 1.3 percent in 2012, economist Robert Hogue said that after two years of “gyrating wildly,” the Canadian housing market is likely to be a much less interesting place for the next several years.
“Going forward, we see nearly perfectly offsetting forces driving Canada’s housing market,” he said. “On the upside, the economic recovery will gather strength in 2011, continuing to boost employment and family incomes. On the downside, interest rates are expected to rise.”
The Bank of Canada will likely raise interest rates by 100 basis points this year and another 150 basis points in 2012, he said, making mortgage payments more expensive for the majority of homeowners. But real gross domestic product is expected to increase to 3.2 percent in 2011 from 2.9 percent in 2010.
“The net effect of these forces is expected to be close to nil, thereby leaving resale activity largely flat,” he said.
There have been a flurry of forecasts issued in the last week, as the market starts the year stronger than expected. Capital Economics issued a cautious report that suggested higher interest rates could drive prices down as much as 25 percent over the next three years, while the Canadian Real Estate Association raised its sales forecast for the next two years as it suggested that a stronger economic recovery and continued low interest rates would keep the market balanced.
“Even though mortgage rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity,” CREA chief economist Gregory Klump said. “Strengthening economic fundamentals will keep the housing market in balance, which will keep prices stable.”
Capital Economics economist David Madani said too many optimistic forecasts are based on too short a time frame to be useful, because many mortgages won’t reset until rates rise much higher than they are today.
“Let’s balance this discussion a bit and think longer term,” he said in a recent interview. “As far as housing prices are concerned, we think they’re overvalued and we don’t see income growth closing that gap.”