Title: Canada’s housing sector continues to amble along

Sub-title: Despite the tough economy, residential real estate prices and construction remain remarkably stable.

 

Analysts often compare Canada to a mouse that sleeps next to an elephant, because developments in the United States often have major effects here. One recent example relates to gloomy housing sector news stemming from our southern neighbour.

 

Despite promising signs, the average price of US existing homes remains sold last month remains far from historical highs. Furthermore, unit sales are down from year-ago levels and more than a third of those sales relate to distressed properties. The problem is that that bad news flowing up from the United States dominates Canadian airways. As a result, one could be forgiven for getting the impression is that Canada’s housing sector is in trouble too. But that is far from the case.

 

Housing sector data

In fact according to the Canadian Real Estate Association, the average selling price of existing homes sold in Canada during September was $331,089, which was unchanged from where it was one year ago. Gregory Klump, the association’s chief economist attributes this to an easing of mortgage interest rates during the third quarter and adds that continued expected low rates should keep home ownership within reach for many homebuyers.

 

Flat prices may sound like bad news to those Canadians who have become accustomed to raking in large capital gains on their residential housing investments. However given the magnitude of the economic crisis that Canada is still trying to get out of, those prices look quite good. The numbers are certainly far better than they are in Great Britain, Spain and in the United States, where house prices fell by near double-digit amounts during both 2009 and 2008.

 

Canada’s residential housing construction sector also continues to look like it’s in pretty good shape. True, according to the Canada Mortgage and Housing Corporation, housing starts fell slightly to 186,400 units in September on a seasonally adjusted annual basis, from 189,300 units in August. Those numbers also are a far cry from the period between 2002 and 2008 when starts were above the 200,000 unit level. However last month’s totals represent a strong bounce-back from the 149,081 houses started during the 2009 calendar year.

 

Canada and the global economy

Experts say that a big part of the reason that Canada’s housing sector is doing so well relative to many others, relates to its strong economy. “Canada is the G-7 growth champion in 2010,” noted Olivier Fratzscher, vice president and chief economist at the Caisse de Dépot et Placement du Québec, in a recent panel presentation at the Conseil des Relations Internationales de Montréal on the future of the global economy. “However there are risks in the growth outlooks of many other nations.”

 

Fratzscher attributes Canada’s success and its relatively stronger outlook for 2011 to its stronger jobs picture (the unemployment rate fell 0.1 percentage points to 8.0% during September), continued demand for raw materials by emerging nations and its stable monetary policy.

 

Warning signs here too

However there are some warning signs. For one, according to The Economist magazine’s latest survey of home prices around the world, Canada’s residential real estate market is overvalued by as much as 23.9 percent. The magazine reached this conclusion by measuring what it costs to buy a house relative to what it costs to rent the same property, and comparing that ratio to historical totals.

 

As if that was not enough, last week the Bank of Canada cut its growth estimates for the Canadian economy to 1.6 percent for the third quarter. The central bank further signalled its concern by announcing that it was keeping it policy rate steady at one percent, following three consecutive increases.

 

However the biggest threat to Canadian house prices may come from that elephant that lives next door. And right now the US economy, which actually lost jobs last month, is hurting. The problem is that Canada is a trading nation and a huge portion of our economy is comprised of exports to the United States and imports from there.

 

If our largest trading partner slips into a double-dip recession, which Francois Dubois, vice-president at Mouvement Desjardins estimates there is a one in three chance that it will, the Canadian job market will feel the pinch, and housing demand will suffer.

 

In short, right now the US economic elephant is sleeping. Canadian housing sector stakeholders just have to hope that it does not roll over.

 

Peter@peterdiekmeyer.com

 

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