Title: Continued strength in the housing sector

Sub-title: But a range of signals leave observers wondering how long it can last.

 

There’s an old saying, that real estate is one of the best places to invest, “because they ain’t making any more land,” that has come under increasing attack recently. Doomsayers such as Garth Turner, (a former cabinet minister), investors who have been following the US housing sector debacle unfold and even the federal government, fret that Canadian homeowners are about to take a bitter pill. Well, if you believe the latest housing sector data, the worry warts have everything on their side to confirm their theories, except data.

 

Once again during February, major sector indicators, including housing starts, the average price of existing homes sold and employment and consumption numbers were once again on the upswing. “Housing activity remains lively and the surge in residential building permits is especially encouraging,” commented Hélene Bégin an economist at Desjardins Group.

 

That said, early this week, several large Canadian banks made significant hikes to the rates they charge to mortgage customers. And while those increases alone won’t send Canada’s strong housing market into decline, experts say that a number of key trends are unfolding that indicate that the sector is unlikely to do as well during the second half of the year as it did in the first.

 

Prices continue to rise, starts remain strong

One of the most important indicators of housing demand is house prices, which according to the Canadian Real Estate Association continue to rise. The average price of homes sold via the lobby group’s Multiple Listing Service (MLS) reached $335,655 last month, up a staggering 18.2 percent since February of 2009. This continued strength in Canadian residential housing prices is particularly surprising given the wholesale prices collapse that hit most US regions following the financial crisis..

 

Canada has seen little of that. The real estate market here did take a brief hit during a few short months of 2008, however the drop affected relatively few homeowners, most of whom tend to hang on to their properties during time of weaker prices. That turned out to be the right move, because for the year as a whole, the average price of existing homes sold fell by less than 1.0 percent. But even that drop is peanuts when combined with the close to 11 percent increase in average existing home sales prices during 2007 and the 5.0 percent gain made during 2009.

 

All of this frenzy on the price side has naturally attracted the attention of builders, who have been sticking a lot of shovels in the ground lately. According to the Canada Mortgage Housing Corporation housing starts rose to an annual rate of 196,700 units during February, up from 185,400 units during the pervious month. That’s close to the magic 200,000 unit annual boom levels that Canada reached during the seven straight years before the financial crisis hit.  Bégin attributes much of the housing sector’s recent vigor to Canada’s strengthening labor market, which has already recovered more than half of the jobs lost during the previous recession, and mortgage rates levels, which remain exceptionally low, despite the recent increases.

 

Dark clouds on the horizon?

That said, according to Sébastien Lavoie, an economist with Laurentian Bank Securities, much of the housing sector’s recent strength is fleeting in nature. “Demand for new homes has been temporarily spurred by provincial sales tax harmonization in British Columbia and Ontario (which will take effect in July 2010), as buyers rush to avoid paying the extra levies,” commented Lavoie. “(As a result) real estate promoters have helped by advancing production.”

 

Lavoie also cites the expiration of federal home renovation tax credits, the tighter mortgage lending standards being imposed by the federal government and projected hikes in the Bank of Canada’s policy interest rate during the second half of the year, and possibly earlier, as factors that will crimp housing starts between July and year-end.

 

One signal that Lavoie may be on the right track is existing home sales, which despite rising prices, actually fell by 1.5 percent last month according to Canadian Real Estate Association data. That said, whether that drop heralds the start of a period of slower year-over year growth in housing prices, as CREA forecasts, or an outright decline, as many fear, remains an open question. All we know is that so far, a lot of people have been howling “wolf” about the housing market.

 

But it’s been all bark and no bite.

 

peter@peterdiekmeyer.com

 

 

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