Title: Canada’s housing market holds firm

Sub-title: Existing home sales are picking up and prices have stabilized.

 

After a period of red hot activity, a strong downturn and then a rebound, Canada’s housing sector appears to be stabilizing. That trend that will likely continue next year, though activity will moderate slightly. So says the Canada Mortgage

Housing Corporation in its recently released Housing Market Outlook (http://www.cmhc-schl.gc.ca/en/hoficlincl/index.cfm).

 

The CMHC projects that 438,400 existing homes will be sold during 2011, roughly the same as this year’s total, currently projected at 440,300 units. Housing starts are expected to slip slightly to 174, 800 from an estimated 186,200 units this year.

 

“Canada’s housing market is stabilizing,” concludes the country’s national housing agency, though conceding that its forecasts have downside risks attached to it. For example a weaker than expected US economy, (which would affect demand for Canadian goods and services, and thus Canada’s jobs market) or a spike in mortgage rates, which are expected to remain flat, could both have major detrimental impacts on housing demand.

 

Net migration (immigration less emigration), another major driver of housing sector demand over the long term, is expected to rise from 260,000 during 2009, to 274,365 for this year as a whole, and to 289,759 for 2011. Strong demand from new Canadians comes at a good time, because it will help compensate for continued low domestic birth rates.

 

On a regional basis, Western Canada, particularly British Columbia, but also Alberta, Saskatchewan and Manitoba, will lead the country in new home construction this year and a recovering economy will push up starts in Ontario. However growth in all of the provinces is expected to moderate next year.

 

The CMHC report is a useful document that provides housing sector stakeholders, who track much of the same data on a monthly basis (and sometimes even more closely) an opportunity to think about the large macro trends.

 

When moderating ain’t so bad

So far, recent data are bearing the CMHC’s forecast out. For example housing starts fell to 167,900 units in October on a seasonally adjusted, annualized basis, from 185,000 units in September. Furthermore, according to the Canadian Real Estate Association, the average price of houses sold via its Multiple Listing Service during the month was $343,747, which was up less than a percentage point from a year ago.

 

In today’s performance-obsessed economic environment, the thought of Canada’s housing sector stabilizing, as opposed to vaulting forward, may seem to some like a big setback. However as Gregory Klump, CREA’s chief economist, points out, it is anything but. “National sales activity is now running almost halfway between the highs and lows posted between late 2008 and late 2009,” says Klump. “This suggests that the Canadian housing market may be starting to normalize. After the roller coaster ride that many housing markets have been on, normal stable market conditions are something that many buyers and sellers will welcome.”

 

Whatever you think of Canada’s housing sector, according to Matthieu Arseneau, an economist at National Bank Financial, it is doing a lot better than that of our southern neighbour, where he notes that housing starts have held at around the 600,000 level for almost two years. If you use the traditional 10-to-one rule of thumb to compare the two economies, the United States would have to generate 1.67 million starts on an annualized basis (or almost triple its current level), to keep up with the Canadian pace.

 

Worse, as Arseneau notes, America’s performance is not getting any better. “Unfortunately, the latest available data do not indicate an improvement in the situation,” wrote Arseneau in a recent note to clients. “On the contrary, activity sank to its lowest mark since April 2009.”

 

Arseneau isn’t kidding. Total inventories of unsold homes in the United States fell slightly to 3.86 million units, which represents a 10.5 month supply. That compares to just a 6.2 month supply here in Canada. And the US total does not include the hundreds of thousands of homes for which payments are in arrears, many of which will eventually be in foreclosure.

 

In short, a stable residential real estate sector might seem boring to some. But stable, when your neighbour and most important trading partner is going through a rough time, is nothing to sneeze at.

 

Peter@peterdiekmeyer.com

 

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