OREANDA-NEWS. With Quebec's lagging economic growth and home prices continuing to weaken, a 'soft landing' is now in progress that should continue to see home prices drift slightly downward over the next year, according to Fitch Ratings.

According to data from Teranet, prices are 4% below their peak in 2012 in real terms, though prices have risen 3% since February on seasonal pressure. Prices are expected to increase modestly throughout the summer, though Fitch estimates that prices remain approximately 20% overvalued.

Aside from the seasonal momentum, however, prices have been on a downward trajectory, with negative year-over-year returns in every month since June 2013. By contrast, national prices have not declined on a year-over-year basis since the downturn in 2009, and are up 8% since 2012.

Quebec unemployment rates remain elevated at 7.6%. Additionally, GDP growth has lagged behind national numbers, growing at an average rate of 1.6% over the last five years following the contraction in 2009. This pales in comparison to the national growth rate of 2.6%. In particular, the Quebecois economy has struggled to replace the economic value of a manufacturing sector that still represents 14% of total economic output, but has shrunk more than 10% since 2006.

Also troubling is the fact that the three sectors that have expanded the most in the last decade are all potentially at risk of contraction. The construction and real estate sectors together represent 18% of provincial GDP and have each grown by more than more than 25% since 2006. This growth ranks behind only the 50% growth in the oil and gas sector, which remains a small slice of GDP, at 1.4%. Fitch continues to express caution given the emphasis on these two sectors, which are likely candidates for a pullback in a housing downturn. Since the peak of real home prices in 2012, the construction sector has contracted by 5%.

Fitch has viewed the Quebec market as overvalued for some time, with its estimated overvaluation peaking at 27% in 2012. Since then, negative real price trends and positive economic growth have reduced overvaluation to approximately 20%. Due to a number of market factors, Fitch's overvaluation estimates do not translate into projected declines. Instead, Fitch has been expecting a 'soft landing', whereby prices trend slightly downward but avoid a more significant crash. Quebec home prices are exhibiting signs of gradual moderation and decline. As a result, Fitch estimates that prices are likely to trend modestly downward over the next several years. Risks may be elevated if the broader Canadian economy falters. However, limited energy exposure in Quebec and a weakening Canadian Dollar which should improve balance of trade should limit significant downside.