A Global Housing Recovery Is Underway, According to Scotia Economics

TORONTO , Oct. 1 /CNW/ - Global real estate markets are showing tentative but growing signs of stabilization, according to the Global Real Estate Trends report released today by Scotia Economics.

"Real home prices increased in a number of major developed economies in the second quarter of 2009, including Canada , Australia and the United States ," said Adrienne Warren , Senior Economist, Scotia Economics. "Prices were still falling in many other markets, including the U.K., France and Spain , but generally at a slowing rate. For the most part, however, real home prices are still lower relative to a year ago."

Scotia Economics believes the improving sentiment in global residential real estate markets is sustainable. According to the report, the firming in pricing is evidence of growing confidence in the sustainability of the fledgling global economic recovery. Historically low borrowing costs, increased affordability, and home-buyer tax incentives in a number of countries are underpinning a modest revival in housing demand. Indeed, signs of a bottoming in home prices are likely now bringing some fence-sitters off the sidelines.

"Financial market conditions, including rebounding global equity markets and an easing in credit constraints, are also becoming more supportive," stated Ms. Warren . "A significant amount of worldwide excess production capacity will keep a lid on inflationary pressures for some time to come, allowing monetary authorities to keep short-term interest rates at historically low levels and very supportive of housing market activity.

"Nevertheless, the rebound in housing activity will be constrained in part by a generally more cautious borrow and spend mentality, with weakened household finances leading to a renewed focus on reducing debt and rebuilding savings," continued Ms. Warren . "Labour market conditions are beginning to stabilize, but unemployment rates remain high and are expected to be slow to decline. A more cautious lending environment is expected to persist as financial institutions around the world recapitalize their balance sheets."

There remain excesses is the global housing market itself that point to an extended period of more subdued activity. Many countries are burdened with an excess supply of unsold housing inventory after years of overbuilding. Despite recent price declines, housing valuation measures such as price-to-rent and price-to-income ratios also suggest some continued overvaluation in many markets.

Yet, even a stabilization in housing prices, demand and construction would be highly supportive of a broader economic recovery, particularly as the near-term fuel provided by government stimulus spending and inventory rebuilding begins to fade.

"Homeownership is a crucial sector of national economies and an important source of wealth for many households, influencing spending, saving and borrowing decisions," said Ms. Warren . "It also has significant spillover to other domestic industries, including retail sales, finance and insurance, and a range of professional and household services."

Canadian Focus - Building Momentum

While not as robust as the revival in resale housing activity, new home construction in Canada has notably turned up. On a trend basis, housing starts are running just over 140,000 annualized units, up from a spring low of around 120,000 units. Most regions are showing gains, with the largest improvement in Canada's four western-most provinces.

"Builders are responding to tight resale market conditions, which tend to spur relative demand for new homes," said Ms. Warren .

Despite the modest rise in new construction, the inventory of unsold new homes, which has been trending higher since 2003, appears to have peaked, having edged down for a third consecutive month in August. The current overhang is a bit higher than its long-term trend, though still well below the peaks reached during the housing bust of the early 1990s.

"We expect resale markets will become better balanced in 2010 as pent-up demand from the depressed levels of last fall and winter wanes and as the number of listings increase, removing some of the recent incentive to add more new housing stock, and cooling price increases in both the new and resale market," concluded Ms. Warren .

Note: Scotia Economics has renamed its regular Real Estate Trends report to reflect the expanded coverage of residential real estate markets to eight major developed economies in addition to Canada and the United States . For a copy the new Global Real Estate Trends and other Scotia Economics reports, visit www.scotiabank.com.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

For further information: Adrienne Warren, Scotia Economics, [phone], [email protected]; Robyn Harper, Public Affairs, [phone], [email protected]