Canadian home resale market forecast update (RBC Economics)

According to a recent report issued by RBC Economics, demand for housing in Canada will be shaped by nearly perfectly offsetting forces, and the net effect of these forces will be close to nil. This means resales activity largely be  flat overall in the coming year.

What are the balancing factors, according to RBC Economics? Sustained growth in the economy, with real GDP growth of 3.2% in 2011, and 3.1% in 2012. This growth will generate demand by creating stronger employment and higher family incomes. RBC Economics also assumes ontinued net-migration, which will keep demographic fundamentals supportive.

Balancing these positive forces will be a likely increase in interest rates, with the overnight rate increasing by 75 basis points by the end of 2011 and another 125 points the following year. A rise in interest rates will dampen demand by raising the proportion of household budgets spent on servicing their elevated debt and by eroding housing affordability, which has recently shown signs of strain.

Regionally, RBC Economics expects the Alberta market to lead the way with growth rates of 7.0% and 6.2% in 2011 and 2012, respectively, although this would, represent only a partial recovery from the substantial 13.6% drop in 2010.  Activity in Ontario is expected to be mainly flat in 2011 relative to 2010 with some weakness emerging next year.

What about Vancouver? “Deteriorating affordability in Vancouver” has slowed house sales overall in British Columbia, after a strong 2010, RBC Economics notes. Still, the initial strength will be enough to lift annual resales by 3.1% to 76,900 units in 2011, according to RBC Economics.