February 22, 2012
Title: Housing market easing off
Sub-title: However building activity remains strong.
The Canadian economy has been showing signs of weakness on several fronts. Job creation, domestic demand, consumer credit and Canada’s terms of trade numbers have been all pointing in the wrong direction. Not surprisingly, existing home sales, which fell by 4.5 percent between December and January, also headed south.
“Canada’s housing market lost a bit of momentum heading into the New Year,” notes Adrienne Warren, an economist with Scotiabank Group. “On a trend basis sales have essentially stabilized and are tracking in line with the average of the past decade.”
Prices too have shown signs of weakening. According to the Canadian Real Estate Association, the average price of homes sold over its Multiple Listing Service increased by only 1.2 percent to $348,178 from year-ago levels. That rise, which is one of the smallest increases since late 2010, is less than the rate of inflation, meaning that homes actually lost value during the period.
Jacques Marcil, a senior economist at TD Economics, sees the weak numbers as a harbinger of things to come. “This month’s decline is likely reflective of what will shape up to be a softer year in sales, especially when it comes to Toronto and Vancouver condos,” says Marcil, who foresees an actual, though slight, contraction in the housing market coming next year.
Continued strength in new construction
Weakness in existing home sales appears to have spilled over into new home construction. According to the Canada Mortgage Housing Corporation, housing starts slipped slightly during January to 197,900 units from 199,900 units the previous month on a seasonally adjusted annual basis.
However according to one expert the drop may not be as bad as it looks. “The pace of new home construction in Canada continues along at a fairly robust clip,” notes David Onyett-Jeffries, an economist at RBC Economics. “While the better than expected showing in the starts data in recent months likely partly reflects the generally milder than usual temperatures that have been prevalent across the country, the growth highlights the continued strength of activity within the Canadian housing market.”
Onyett Jeffries is right. Unlike America’s new home construction market which went into a freefall following the financial crisis of 2008, Canadian workers have kept on hammering. Generally new home demand comes from two sources, immigration and household formation, which economists estimate at about 175,000 units. Current building activity is running far above those numbers, and could well continue at current high levels for the rest of 2012 and 2013 according to a CMHC forecast made at mid-month. That’s extremely good news because home building and related activities are one of the main employment drivers in the economy.
Continued strategic factors
In fact even the tail-off in existing home sales comes as no great shock to many housing sector observers. House prices here have remained extremely strong on a global basis, not just relative to the United States, but to also to the UK, Ireland, Spain and many other countries. Economists have been predicting a cooling off period for some time.
However several factors have combined continued to keep the party going longer than many expected. For one, despite the fact that house prices have long been at historically high levels relative to incomes and rents, and that Canadian households are borrowed to the hilt, current low interest rates have gone a long way to keep them affordable.
In addition, despite recent sluggishness, the Canadian economy has been performing surprisingly well in recent years sparked by strong demand for natural resources, particularly oil, which has been trading above US $100 a barrel in recent days, due to tensions created by Western pressures on Iran regarding its nuclear reactor program. In short, after the strong gains that Canadian homeowners have registered in the years following the financial crisis and in the decade prior to that, a cooling off period was clearly in order.
And when contrasted with the crashes that occurred in overbought markets, that break is probably a good thing.
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