Get ready for a bumpy housing market ride, economists predict

If you have a queasy stomach, you may want to take a Gravol because the Ottawa real estate market may be in for a bit of a bumpy ride over the next few years.

That's the prediction of two economists speaking at the Greater Ottawa Home Builders' Association economic forecast seminar this week.

RBC economist Paul Ferley and TD economist Sonya Gulati say Ottawa and the rest of the country are not protected from the world's economic woes.

"The Ontario housing market outlook is not immune to global financial market pressures," says Ferley. "The development in Greece and Italy may seem like someone else's concerns, but they do present a threat to the local economy."

And with more than half of Ontario's economy relying on exports to the U.S., the province is "very much dependent on U.S. growth," he says.

They both forecast the economic recovery across the country will be moderate and urge the province and individuals to practise fiscal restraint, particularly given that Canadian households are holding record debt levels, which will pose a massive problem when interest rates finally climb. Given the U.S. Treasury Board is expected to maintain lower rates until 2013, Canada is likely to follow suit. But once lending rates do rise, which will happen - as soon as next year, they say - that will pose an issue for families struggling to make ends meet.

"We have to watch debt," says Gulati. "If there's a 1.5-percentage point increase in rates, that translates into $250 extra for the average household. That is significant for people on a tight budget."

She estimates Canadian homes are overvalued by 10 per cent, so we should expect a price correction of around the same amount. She says home affordability will remain low and gradually deteriorate due to impending higher interest rates.

"You can expect a gradual unwinding of home prices and sales activity," she says.