Bankrate.ca

 

November 2011

 

Title: Crisis? What crisis?

Sub-title: Canadian home sales outlook upgraded despite continued uncertainties.

 

In the mid-1970s a then-hip but now aging rock group named Supertramp released a breakthrough album called Crisis? What crisis? whose title echoes the current state of Canadian real estate. For months, experts have been saying that spill-over effects from the tough global economy will eventually hit the housing market here, as in many other international cities. Yet while that may happen, we are still waiting.

 

“There was no shortage of headline news in October about global financial market volatility and economic uncertainly. Bt it doesn’t appear to have dampened homebuyers’ spirits,” notes Gary Morse, president of the Canadian Real Estate Association (CREA). “Interest rates are at low levels and are likely to stay that way for some time to come, (and) homebuyers clearly see opportunities.”

 

CREA itself was one of those experts fooled. Earlier this month the organization was forced to boost its forecast for home sales activity via its Multiple Listing Service, for both this year and next. CREA now expects that 453,300 homes will be sold this year, up from its earlier prediction of 446,915 units. That would bring the increase in home sales up from 0.9 percent to 1.4 percent.

 

Continued strength in residential real estate data

The Canadian housing industry seems to be performing well all around. Home sales edged up again in October to their highest level since January. In addition, the average price of homes sold in October (actual, not seasonally adjusted) came in at $362,899, a 5.5 percent increase since the same month last year. While this was the smallest increase this year, the momentum is in the right direction, far better than in the United States where the housing market has yet to show convincing signs of bottoming out.

 

With continued strong resale activity and pricing, it should come as no surprise that homebuilders have also been active. According to the Canada Mortgage and Housing Corporation, housing starts came in at 207,600 units last month on a seasonally adjusted annualized basis. While that total is down slightly from the 208,800 units stared in September, the number is unusually high. That’s true both compared to other western economies where construction has been seeing hard times relative to historical averages and with regard to traditional demographic trends such as immigration and new household formation, which create annual demand for about 175,000 new units, far below current construction levels.

 

Affordability remains strong

As CREA’s Morse noted, part of the reason for continued demand stems from housing affordability trends, which remain positive. Just how positive, was confirmed by RBC Economics earlier this month when it released its quarterly Housing Trends and Affordability Study, which concludes that uncertainty overseas might actually have had somewhat of a positive effect in Canada.

 

“Developments related to the (European sovereign debt) crisis likely provided some benefits in the form of lower interest rates,” concludes Craig Wright, the financial group’s chief economist. “For instance fixed mortgage rates (on a five-year, posted basis) eased to 5.3 percent during the third quarter of 2011, from an average of 5.6 percent in the second quarter.” In addition, the Canadian economy continues to perform well relative to other western economies. Despite a drop last month, job growth remains positive, inflation is under control and gross domestic product remains on an upwards trajectory.

 

Yet despite the Canadian residential real estate sector’s continued strength, homeowners and shoppers would do well to remain vigilant says one expert. “The combination of Europe debt crisis and the U.S. Super Committee failure (to reach a budget cut deal) has spiked financial and economic uncertainty,” notes Sherry Cooper, chief economist at BMO Capital Markets. “All businesses and households are impacted by these developments, even in stable prudent Canada.”

 

Those concerns were echoed in late November by the OECD which significantly weakened its economic outlook for the country, due in part to slower household spending and moderating demand for its exports. However judging from continued strong home prices and sales, that message does not seem to be fully getting through.

 

For now, in Canada it seems like its business as usual, with housing sector stakeholders asking themselves: “Crisis? What crisis?”

 

Peter@peterdiekmeyer.com

 

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