Editor's Note: "Five Questions For" is a periodic series in which Move Smartly bloggers get answers to the questions we'd all like to ask about real estate.
TD Economics made headlines a few weeks ago when they released a report forecasting a 10% decline in Canadian home prices.
I invited TD Bank Senior Economist Pascal Gauthier to answer five questions about the report they recently published and about Toronto's real estate market overall:
John Pasalis: Hi Pascal, thank you for taking some time to answer a few questions about the recent TD Economics report on Canada's real estate market. Your colleague Grant Bishop calls for a roughly 10% decline in average home prices in Canada. When do you see this happening? Do you expect a quick decline in prices or is this going to carry into 2011?
Pascal Gauthier, TD Economics: The -10% mentioned by my colleague Grant is a peak-to-trough figure, rather than an annual average. Some of that adjustment is already under way on a (seasonally-adjusted) month-to-month basis, with average prices down about 3.5% since May. We think we are roughly a third of the way through the price adjustment, implying roughly another 9 months of trend decline – bottoming sometime in the first half of next year, likely Q2 on a quarterly basis.
John Pasalis: In May 2010, TD Economics released a report forecasting a roughly 5% total decline in home prices by the end of 2011. What economic factors have changed over the past three months to account for the significant change in TD's forecast?
Pascal Gauthier: The May report referred to a -2.7% annual average national price change in 2011. As of August, this had been revised down slightly to -3.0% (see our latest housing tables, page 2)
John Pasalis: The strong recovery in the housing market in 2009 caught virtually everyone by surprise. What impact, if any, do you feel behavioral variables such as consumer perceptions and confidence have on the real estate market and how do you as an economist account for such variables?
Pascal Gauthier: Household confidence is a fickle beast that is difficult to model. Nonetheless, we do overlay our professional judgment on top of what our standard models forecast, in particular with the supply-side (listings), depending in part on where we feel sentiment is headed.
John Pasalis: What's your outlook for Toronto's real estate market?
Pascal Gauthier: The larger than national decline you see for Ontario (-3.4% in 2011, annual basis) is largely driven by our GTA view which drives the overall provincial market.
John Pasalis: Any specific thoughts on Toronto's condo market? Is there a risk that there will be an oversupply of units 2-3 years from now?
Pascal Gauthier: We produced a report in May 2009 which looked into this issue. The number of units under construction remains elevated, so it certainly something we keep on the radar. So far, absorption has been good, and unsold inventories are not at worrisome levels. With an improvement in housing affordability, employment, and the overall economy in the next few quarters, our conclusions from that report still appear valid.