Title: Housing market begins to cool

Sub-title: After an exceptionally strong post recession bounce-back, residential real estate is taking a breather. That may not be such a bad thing,

 

Judging from the May housing data it looks like experts’ predictions that the real estate market would slow during the second half of the year may be on target. Existing home sales, new listings and housing starts all slipped during May, and indications are that the trend will continue.

 

According to the Canadian Real Estate Association, 37,576 homes traded hands (on a seasonally adjusted basis) during May, compared to 38,654 homes during May of last year. The average price of homes sold during the period rose by 8.5 percent, compared to those sold during the same month last year, to $346,881. However the percentage increase was significantly smaller than the 13.6 percent year to date average.

 

A combination of rising mortgage rates, changes to mortgage regulations and the impending July 1rst implementation of the Harmonized Sales Tax in Ontario and British Columbia, (which pulled forward some sales into April that normally would have closed in May or later) are being blamed for the sluggishness. According to Adrienne Warren from ScotiaBank Group, the figures provide further evidence that Canada’s housing market has “lost momentum.” The reduced demand not surprisingly put a damper on homebuilders, as housing starts also fell – to 189,100 units in May, compared to 201,800 units during April.

 

Mixed economic factors suggest cooling off period

Yet while short-term factors are likely indeed responsible for some of the month-to-month variations in housing data, more structural elements are also clearly at play. The Canadian economy for one, which had been growing steadily for seven straight month, came in flat during April. Retail sales, which had been climbing steadily since the beginning of last year, also tanked during April falling 1.9 percent. Consumer confidence too, as measured by the Conference Board of Canada fell by 5.7 points according to the most recent data. On the other hand, Canada’s May employment data were relatively strong. Close to 25,000 new jobs were created during the month, bringing to 310,000 the number of new posts created since mid-2009.

 

One possible red flag is current household credit conditions, which has been slowly deteriorating. Mortgage debt for one continues to rise at an 8.0 percent pace on a year over year basis, and that’s on top of the $920 billion that Canadians owed on their homes at the end of 2009.

 

The best possible solution?

Ironically, while many housing stakeholders, particularly those accustomed to steady price rises may view a cooling off period somewhat negatively, the development is likely a net plus. For one price rises cannot continue indefinitely. At some point enough jobs needs to be created and households to be formed to absorb all of the new homes being built, and salaries need to rise, so that those new households can afford to buy those homes.

 

Younger Canadians and those thinking about buying their first homes will be particularly pleased. During recent years, housing affordability in Canada has drifted steadily out of whack, leaving many wondering if they will ever get a chance to afford a place of their own.  Pascal Gauthier, senior economist at TD Bank Financial Group believes that “by the end of 2011, average prices will have pulled back by roughly 7.0 percent from their 2010 peak.” If that happens, it will open the door to a whole class of people that had previously been priced out of the market.

 

In fact compared to what is going on elsewhere. Canada’s real estate sector looks just fine thank you. In the United States, the UK, and Spain for example, years of constant resale price increases ended abruptly, when home values began to shrink dramatically. In the US, those drops were so dramatic that DeutscheBank last year predicted that up to 48 percent of homeowners there would owe more for their mortgages than what their actual homes were worth.

 

If here in Canada the worst thing to happen was that price increases would merely taper off, or even fall slightly; that may not necessarily be such a terrible thing.

 

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based freelance business writer.

 

 

 

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