House Prices to Keep Rising: Study

by TONY WONG, BUSINESS REPORTER www.thestar.com

Bank sees value gaining 4% a year. Increases to vary by neighbourhood - Toronto homeowners should see about the same level of price appreciation in existing homes in the next 25 years as they have experienced in the last quarter century, once inflation is taken into account, a study says. However, the price gains in the city are expected to continue to beat the national average. Resale home prices in Toronto are forecast to rise more than 4 per cent annually in the next 25 years, according to the TD Bank Financial Group report released yesterday. The national average is expected to be less than 4 per cent in comparison. "Cities such as Toronto and Vancouver really stand out to gain the most. With an aging population you are looking for immigration to drive housing demand and immigrants principally arrive in these two cities," TD deputy chief economist Craig Alexander said. "Immigrants tend to go to the largest urban centres which give the large cities an edge." Still, the forecast for Toronto is below the nominal price gains of the prior 25 years. From 1981 to 2005 Toronto resale home prices hit 6.7 per cent annually.

However, once inflation is factored in, real gains works out to be about 2.8 per cent. Nationally, the average annual increase in prices over the last quarter century has been 5.6 per cent. After factoring in inflation, gains were 1.9 per cent. "Even though the nominal gains moving forward will be less, the real gains will be about the same once you take inflation into consideration," Alexander said. One reason for the slower price appreciation is the "declining trend in inflation over the past several decades," says the bank. Since the mid-90s, the Bank of Canada has been aggressively fighting inflation and this should continue, the bank says. Alexander said the report was done because of the current obsession over house prices in the short term. "There is a lot of speculation right now over what will happen to the market. But if you get away from all the short-term gyrations, what is history telling us about housing price growth?"

History it seems, is bound to repeat itself based on TD's study. The principal determinants of housing prices include demographics, personal income growth, interest rates and supply, Alexander said. The bank sees an increasingly aging population, expanded by immigration, particularly in the larger cities. Personal income is expected to rise, while interest rates are expected to stay low. The bank also is forecasting less new building in the future. One important issue to remember is that location still plays a major role in determining housing price appreciation, Alexander said. "Cities are big generalities since you can have huge differences within neighbourhoods, so location can have a tremendous impact," Alexander said. In the short run, housing price growth is cooling considerably in the Toronto market. Resale home prices should end up less than 5 per cent higher for the year at the end of this year according to housing economist Will Dunning. Last year house prices increased by 6.7 per cent and 8 per cent the year before