Canadian home prices to fall 5 percent: BofA report

Mon Dec 19, 2011 5:47pm EST
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By Jon Cook

TORONTO (Reuters) - Weaker Canadian economic growth and an oversupply of condos will lead to a 5 percent drop in home prices in the first half of next year, a report released on Monday by Bank of America Merrill Lynch said.

Canadian housing prices are overvalued by as much as 10 percent, the report said, with demand spurred by record-low mortgage rates spawned by the Bank of Canada's decision to keep its key interest rate at an ultra-low 1 percent.

"The combination of weak growth, large supply in certain large markets and the relative valuations themselves conspire to warrant a contraction (in 2012)," said Bank of America economist Sheryl King.

"A 5 percent contraction is pretty modest by historical standards," King added. "I don't think that it's a very bold call at this point."

BofA forecast home prices would contract in the first half of 2012 as demand slows in a tougher job and income-growth environment. It said, however, that they would end the year flat as economic activity accelerates.

The majority of the correction will come in Toronto area, where an oversupply of condominiums is expected to push prices down, the report said.

"We estimate there are already enough units in the pipeline to satisfy fundamental demand for the next five years," it said.

Household debt, which rose to a record high in the third quarter as mortgage and consumer credit increased, and an unemployment rate that BofA predicts will rise to 8 percent will also hit demand.   Continued...