Western Canada is on the verge of a housing slump with almost every major city suffering from inflated market prices, according to a new study by a pair of Merril Lynch Canada economists.
The report shows that homes in Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton are all overvalued by more than 10 per cent. In B.C., Victoria and Vancouver's market prices are estimated to be inflated by about 35 per cent. Saskatchewan's housing market is said to be overvalued by about 50 per cent.
Part of the problem is that too many homes have built over the last six years, leaving a surplus on the market.
In nearly every western province, there are twice as many homes for sale as there are being sold. As the new home market slows down, there are worried that there may be layoffs in western Canada's busy construction sector.
But Pamela Alexander, a real estate analyst with Re/Max, said she believes the market will settle soon.
"That economy is super strong, oil and other commodities have really just helped drive the prices up," she said in an interview with CTV Newsnet. "Real estate is cyclical in nature. In Vancouver and Victoria, I don't think they've had any type of correction in more than 20 years.
"There is a chance things will settle down, that there will be more listings on the market and that prices and growth will ease the next year or so," she continued.
The rest of the country, including Toronto, is better balanced, the analysis concludes. However, Sudbury and Montreal are also similarly overvalued.
Alexander said that while housing prices in Ontario have been high, the increases have been steady and the market has remained stable.
The calculation was done by economists David Wolf and Carolyn Kwan who looked at current prices, affordability and long-term trends. The report was released the same day Statistics Canada revealed data that showed residential and corporate construction had dropped.
"Our conclusions show that we think we've peaked in terms of the housing valuations and we're in a period of sustained decline going forward," Kwan said.
The economists predict Canada's housing market will mainly suffer from a cut in demand for an excess of housing available. The market will also stall as new buyers choose to hold out from buying homes at a high price. The suburbs will feel the impact as higher fuel prices will likely discourage commuters from buying a home too far from their workplace.
Kwan says that the housing market decline could affect other areas of the economy as well.
"As people buy fewer homes, we'll also expect them to buy fewer of the things that go into new homes, for example drapes and furniture and things like that," she said.
Canadians are at an advantage because of the country's stringent credit conditions that applicants need to meet before being approved for a loan. In the U.S. a flexible credit plan allowed many people to buy homes who otherwise wouldn't be able to afford it.
The market downturn will not be as detrimental as the housing slump that has plagued the markets in the U.S., the economists say.
