TORONTO -- Canada's housing market is expected to continue to soften this year, as fewer people look to buy and home construction begins to slow down, according to report released Monday.
The report says housing prices are beginning to level out and home building rates are decreasing, in response to the market getting back into balance.
"We expect the reduced momentum in sales and construction will continue in 2013. High home prices and tougher mortgage financing rules are tempering demand, especially among first-time buyers," wrote Adrienne Warren, a senior economist with Scotiabank (TSX:BNS).
"Investors also appear more reluctant to enter the market at current valuations. An anticipated softening in the pace of job growth in Canada would reinforce the slowing."
Softer prices and fewer buyers will lead to a large correction in prices in some housing sectors, particularly condominiums in several major centres if there is an oversupply compared to demand.
Despite this, the report cautions that a sharp correction in the general national housing market is unlikely unless there is a "major adverse economic shock" that weakens domestic activity and hiring.
"Ultra-low interest rates will continue to provide support," Warren wrote.
The report also pointed out to several demographic factors that may play a part in slowing down the housing market.
For one, there will be slower turnover as many seniors choose to stay in their homes as long as they can.
Meanwhile, the report says both the immigrant population and one-person households are on the rise in Canada, and will continue to drive demand for rental units in urban centres.
The report came a week after TD Canada Trust (TSX:TD) forecasted that home price gains will average only about two per cent, essentially keeping up with inflation, over the next decade.
