Title: Housing market begins to cool

Sub-title: Analysts’ warnings that rising interest rates, tougher lending standards and HST implementation would affect Canada’s real estate sector are proving bang on.

 

Canadian housing sector stakeholders got cold showers earlier this month following the release of the latest industry data. Existing home sales, housing starts and prices charged for newly built homes all came in weak. According to the Canadian Real Estate Association sales activity fell a sharp 30 percent in July, compared to the same month last year. The average price of homes sold rose just one percent during July to $330,351, during that period, a pittance, relative to the double digit increases that Canadians have become accustomed to in recent years. As if that were not enough, the Statistics Canada’s New Housing Price Index rose by just 0.1 percent during June, down from the 0.3 percent increase recorded in May.

 

As a result of the weak demand, housing starts slipped slightly according to the Canada Mortgage and Housing Corporation to a seasonally adjusted 189,200 units in July from 192,300 units the previous month. The only good news to come out of all of this is that real estate sector stakeholders have had plenty of time to prepare for the slowdown.

 

Pulled forward demand

In fact one could argue that a bit of a breather for Canada’s real estate market was inevitable. That’s because many Canadians rushed into the housing market during the first half year, due to unusually favorable conditions in existence at that time, notably the absence of the HST in Ontario and British Columbia until July 1rst when it was implemented in those provinces.

 

Analysts such as Douglas Porter of BMO Capital Markets, who for some time have been warning that the housing sector would face a tough second half of 2010, have been proved right. “It looks like anyone who wanted to buy a house this year in Canada got their shopping done early,” commented Porter. “The combination of tighter mortgage insurance rules, a modest back-up in borrowing costs, and (implementation of) the HST have delivered a hammer blow to sales.”

 

Another factor at play was the fact that Canada’s housing sector bounced back extremely rapidly from the global recession and financial crises. Monetary authorities around the world pumped such vast amounts of cash into the system, that a fast rebound in asset prices was inevitable. However the scale of the gains registered last year and during the first half of 2010, clearly could not continue indefinitely. Government authorities were among the first to tacitly admit this, when tighter lending standards were imposed earlier this year, and then later when the Bank of Canada began raising its target interest rate, in order to slow the rise in economic activity.

 

Far better than the Joneses

Canadian housing sector stakeholders can however take consolation for the fact that things up here are far better than they are south of the border. According to the National Association of Realtors, existing home sales in the United States recently fell to a 15-year low there during July and the median selling price slipped by 0.2 percent from the previous month to just $182,000. As if that weren’t bad enough, housing starts there came in at a shockingly low 546,000 units in July.

 

According to Francis Généreux, a senior economist at Desjardins Group, using the rough ten-to-one ratio often used to compare the two countries, the US would have to see housing starts in the 2 million range to reach roughly the same pace of activity as in Canada. “However we don’t see housing starts rising even to the million level there any time soon,” said Généreux.

 

In fact the recent divergences in the Canadian and US real estate markets, coupled with a strong loonie, indicate that there may be some good buying opportunities on the table south of the border, for Canadians who are willing to stick their necks out a bit.

 

What happens next?

That said, despite the initial sluggishness, the outlook for Canada’s real estate sector for the rest of the year remains an open question. As Derek Holt, an economist at Scotiabank Group points out, the slowdown in sales activity has let to housing inventories rising at an unusually rapid pace, which in turn could lead to further price weakness down the road.

 

Porter from BMO Capital Markets agrees. “Headlines will no doubt look soggy for the next few months. Although with long-term mortgage rates dropping, employment improved and prices stabilized, the longer term outlook is far from dire.”

 

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

 

 

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