By John Morrissy, Financial Post; Postmedia News
The dramatic, decadelong run-up in house prices reported by Re/Max will become a distant memory in the years ahead, possibly even calling into question the postwar mantra that buying real estate is a surefire investment, analysts said Tuesday.
Realtor Re/Max issued a report Tuesday that showed house prices climbed an average of 6.82 per cent every year from January 2000 to December 2010, a pace of growth that BMO Capital Markets economist Robert Kavcic described as unsustainable.
"Over time, house prices tend to follow the rate of income growth, which is a little faster than inflation but certainly not seven per cent a year," Kavcic said.
"Over that period we saw income growth on a per-capita basis of about half that rate. That's fine if you have offsetting factors like falling mortgage rates and longer amortization periods like we saw over the past 10 years."
But looking ahead, Kavcic warned, the exact opposite is taking shape -mortgage rates are rising and amortization periods are shrinking.
In that environment, house prices will likely lag income growth, which Kavcic expects to average about 3.5 per cent a year.
Assuming inflation runs only at the Bank of Canada's target of two per cent a year and housing prices gain an optimistic three per cent, the net return to investors will be a scant one per cent a year, possibly less.
By comparison, in the decade gone by, prices in Edmonton posted a compound annual growth rate of 9.25 per cent a year for 10 years, the Re/Max report said.
The past decade was one of the healthiest periods on record for Canadian real estate, Re/Max said, but already the housing market is off the boil, slowing considerably over the past several months.
Canada Mortgage and Housing Corporation said Tuesday the seasonally adjusted annual rate of housing starts totalled 170,400 units during January, down more than 10 per cent from 2010's total of 189,930 units.
"A return to the 2008 high watermark is not in the cards any time soon," said Sonya Gulati, an economist with TD Economics. "Rather, we anticipate activity to ease to 160,000 in 2011 . . . It will likely take a few years before 2010 levels are once again revisited."
Meanwhile, the Canadian Real Estate Association revised up its outlook for housing resales in 2011 on Tuesday, but is still calling sales to fall 1.6 per cent this year to 439,900 units and for prices to edge up by only 1.3 per cent in each of 2011 and 2012.
If prices were to languish for an extended period, Kavcic said, the impact could begin to eat away at people's long-held assumptions about the economic merits of buying a house.
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