April 22, 2011


Title: Housing market continues to boil

Subtitle: Price rises continue to outpace forecasts


Canada’s residential housing prices continued to defy the experts last month by bounding steadily upwards. The average price of homes sold via the Canadian Real Estate Association’s Multiple Listing Service rose to a dizzying $371,286 during March, up 8.9 percent compared to the same period last year. Much of the increase was driven by the red hot Vancouver market, where the average price of homes sold rose to an eye-popping $786,311 up 13.4 percent of compared to the same month last year.


“The greater Vancouver area truly stands out,” notes Robert Hogue, a senior economist at RBC, regarding the effect that numerous multi-million property sales in the area had on Canada’s national data. According to Hogue during the first quarter of this year the average price of homes sold in Canada rose by 7.2 percent, however the increase is only 2.6 percent if those Vancouver sales are taken out of the equation.  


The strength of Canada’s residential real estate market is even more impressive when compared to the situation in the United States, where median existing home prices fell to $159,000 (in American dollars), down by 5.9 percent compared to March of last year.


Job creation and low mortgage rates

The major drivers of housing demand continue to be strong employment growth and rock bottom mortgage rates. Although there was a slight dip in March, the Canadian economy created close to 80,000 jobs during the first quarter of this year.


That growth has been spread relatively evenly throughout the country, with 19 of 27 areas producing net new jobs. Many of those new jobs are in the construction sector. According to the Canada Mortgage and Housing Corporation housing starts rose to 188,800 units in March on a seasonally adjusted basis, up from 183,700 units the previous month.


Low borrowing costs also continue to be a big driver of housing demand. According to’s survey of financial institutions, the average posted interest rate charged for a fixed five-year mortgage in Canada is now in the 4.75 percent range and many lenders are willing to lend for far less.


The problem is that neither of the two main underpinnings of Canada’s strong housing sector are sure to remain positive over the medium term. Rising oil prices and an end to the US Federal Reserve’s quantitative easier program, which had stimulated the stock market and business investment by flooding the American economy with newly printed money, will almost certainly put a damper on growth prospects over the near term. And any slowdown in the US is sure to affect Canada, due to our heavy dependence on exports there.


Interest rates set to rise

Interest rates too are likely to slowly creep up during the coming year. For example Laurentian Bank Securities recently predicted that the Bank of Canada would boost its overnight rate, from 1.0 to 2.5 percent between now and the middle of next year in increments starting in either July or September.


Canada’s central bank had been keeping interest rates low to help the country bounce back from recession. However low interest rates encourage people to borrow and spend. When that happens, inflation tends to rear its ugly head which is what is starting to happen now. The headline consumer price index shot up to a 3.3 annual pace in March. Although much of the increase was due to rising oil prices, the news provided a shot across the Bank of Canada’s bow, indicating that if money is not tightened soon, inflation expectations could rise even further.


The question right now is what all of this will mean for housing. The Economist Magazine recently noted that house prices in Canada were roughly 20 percent overvalued relative to rents. Many analysts predict that the real estate market will remain in balance for the foreseeable future. For example RBC’s Robert Hogue predicts that re-sale prices will rise by 0.5% for this year as a whole and by 1.3% next year. The Canadian Real Estate Association recently also made similar predictions.


Of course analysts have been saying that Canada’s real estate market will balance itself out for some time. But so far, home buyers don’t seem to be listening.





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