Housing market stumbles

What a shift! The buoyant Canadian housing market that led the economy out of recession and that has been driving economic growth for the last 15 months has started to weaken. It’s a downturn that has been greater than expected. Ron McDougall reports …

Sales of homes in Canada dropped 30% in July compared with the same month a year ago and about 6.8% since June. Leading the way were Vancouver, down 45%, and Calgary, down 42%, over last July. And Toronto home sales were 29% lower in the first two weeks of August compared to the same period in 2009.
Although prices have moderated to some extent, average resale house prices dropped 3.5% in July but remain 1% higher than a year ago.
Interestingly, when compared to the international trends, Canada appears to be at the bottom.

This has been confirmed by a new report by the Bank of Nova Scotia which says that as global real estate prices have been slowing in the second quarter of 2010, Canada has had the most dramatic cooling off of all countries. This conclusion is based on the fact that average house prices in Canada were up 16.6% in the first quarter versus last year, but just 6.6% in the second quarter.
Fingers point to accelerated buying in the first half of this year as the explanation for the downturn in sales. “While this softening in sales is very real, we continue to view it as a giveback to the surge in sales in the first half of the year,” said Doug Porter, Chief Economist of BMO Nesbitt Burns.
Apparently, that surge was driven by several factors.
Concerns, mostly unjustified, about the impact of the introduction of the Harmonized Sales Tax in July in Ontario and British Columbia spurred sales in the first part of the year. But those concerns now appear to have been an overreaction as the HST applies only to new homes valued above $525,000. The HST has no impact on the price of resale homes yet real estate commissions (paid by the seller) increased by 8%.
In addition, repeated warnings that interest rates were going to rise throughout the year undoubtedly pushed many into early buying. Although interest rates in general have moved up marginally, long-term mortgage rates have moderated. “Borrowing costs may be less of a factor on housing than initially feared,” said Porter.
The tightening of the rules in February for obtaining mortgage insurance may also have precipitated early buying.
The result is that all the accelerated buying heated up the market in the first part of the year, leaving us now with the disappearance of that demand.
The resale market in central urban areas has not dropped off as quickly, but there has been a big shift in the way the market is acting nevertheless. Let me give you my personal experience relating to the major urban markets. My house in central Toronto was listed for sale on a Tuesday in late May with the stipulation that all offers would be received the following Tuesday at 6pm. The week was filled with private showings and two crowded open houses on the weekend. Multiple bids were received and a small bidding war took place. By 8pm, the house was sold at about 3% above the listing price – after only 8 days on the market.
But now, three months later, the bidding wars are gone, the fixed schedule for bids is gone, the open houses are only modestly attended and the houses are remaining longer on the market. And sellers in major urban centres are still reluctant to lower their prices, preferring to wait out the market.

Which means that it’s not yet a buyer’s market, but has shifted from a seller’s market to a more neutral one.
 One subset of the urban market is worth noting – the condominium market. First of all, in Toronto, the city with the largest development of condos, demand has dropped off dramatically and there is danger of an excess supply of new condos. However, in Ottawa, the demand for condos remains almost heated.

Where is the housing market going? It is important to understand that the Canadian housing market is not headed in the same direction as the devastation that has taken place in the U.S. housing market. The reasons are multiple: the subprime mortgage problem does not exist in Canada, the Canadian economy is stronger and job creation is moving upward at a faster pace.

However, many economists say that Canadian homes may be overvalued by as much as 10%-20% so there will be a gradual weakening of prices. TD Bank economist Grant Bishop expects prices to sink more through 2011 and then stagnate for several years, essentially following inflation.
Household debt levels and home affordability have both taken a big hit during the housing market boom in late 2009 and early 2010. Declining sales and prices will help to alleviate these problems.
Meanwhile, the Canadian Real Estate Association, the industry’s trade association, has modified its forecast of resale home sales downward for the second time in the last three months. It is now projecting sales of 459,600 units in 2010, down 1.2% from last year. It is also projecting a further 7.3% decline in 2011 to 426,100 units with average prices expected to fall by 0.9%.
New home sales will also be moderating. The Canada Mortgage and Housing Corporation has reported that housing starts were down 1.6% in July from June, the third consecutive month of declines. But within these figures, single family dwellings in major cities are down by 11.3%, moderated by increases in apartment units.  
Housing starts are used as a leading indicator of the direction of general economic activity. Statistics Canada says that the cooling housing market coupled with a flagging U.S. economy has dampened the forecast for its leading economic indicator index. Although the Canadian economy is expected to continue to grow, the pace of growth will slow. This may well mean that Mark Carney, Governor of the Bank of Canada, will have to resist any further interest rate increases this year for fear of choking off that growth.
For now, the housing market will be moving to a back seat in the economy.

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