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Property investors in Canada likely to see sliding property sales and prices

Adrienne Warren, senior economist at Bank of Nova Scotia is forecasting a drop of 15 to 20% in the volume of existing property sales in 2009 from 2008 and a fall of 10% in the average resale price.

Last year average real estate home prices fell 1%. The decline marked a reversal from the 10% annual increase that gave property owners a feeling of increasing wealth during the long running boom between 2002 and 2007.

But the situation worsened dramatically in 2008 and in January, the national average price tumbled 11% from the same month last year.

In 2009 Vancouver, Sudbury and Calgary could see an even worse decline than the national average this year, because those cities have the greatest imbalance between supply and demand, Warren said.

Meanwhile, she added that the federal government's recently announced renovation tax credit for households should help the renovation industry in 2009. The growth in renovation spending slowed to about 4% in Canada in 2008 from about 8% annually in previous years this decade.

While the tax credit should encourage property owners to spend on renovations and repairs, the drop in existing home sales and prices will likely weigh down overall spending, she said.

Summing up the impact of the global economic downturn she said that Canada's cyclical real estate boom began to wind down in late 2007, as several years of increases carried residential property prices out of the reach of average income earners. Also a surge in new building led to oversupply.

Then the cyclical downturn was exacerbated by the dramatic economic decline in North America caused by the sub prime crisis in the US.

The bank's chief economist, Warren Jestin, said the bare essential for economic recovery in North America is the stabilization of property prices in the US. He believes that there are many people in the US who are able to buy property right now but are just holding off because they think the timing is wrong.

But the former sub prime mortgage holders that didn't have close to enough income to carry a mortgage long term are unlikely to get back on the property ladder so an excess supply caused by overbuilding in the US will take a long time to absorb.

He also predicted that interest rates could fall further this year in Canada but looking to 2010, he said that the US and Canada could see higher bond yields and higher mortgage rates if investors currently seeking security and liquidity shift their emphasis to yield.