April 24, 2012


Title: Housing data continues to look good

Sub-title: Job creation and low interest rates drive demand.


As many forecasters long been expecting, Canadian housing prices, which are at fairly high levels relative to rents and household incomes, have begun to stagnate in recent months. For example the average selling price of existing homes sold in the country via the Canadian Real Estate Association’s Multiple Listing Service dropped slightly during March to $369,677, down 0.5 percent compared to the same month of last year.


That said, the news wasn’t all bad.  The number of homes trading hands actually rose by 2.5 percent, to its highest total since April of 2010. In addition, inventories of unsold existing homes fell to 5.7 months worth, down from 5.8 months in February. On an even more positive note, housing starts rose to a seasonally adjusted annual rate of 215,600 units in March, an exceptionally high total relative to household formation in the country, up from 205,300 units in February. This strong increase, to what are fairly positive levels in historical terms, was sparked in large part by demand in Ontario, where starts rose by an impressive 30.3 percent. 


“Housing appears quite calm, but there is plenty of churning beneath the surface,” says Sherry Cooper, chief economist at BMO Financial Group, who contrasts increased sales and pricing power in Toronto, particularly in its condo market, with double digit price declines in the Vancouver region. “In fact, the national market (taken as a whole) is broadly balanced”


Job creation and low interest rates

Recent demand for new homes has been influenced in large part by positive job creation numbers. According to Statistics Canada’s Labour Force Survey, the country created an impressive 82,300 jobs in March. That’s almost eight times the number predicted by consensus forecasts, and nearly as many as the 120,000 created in all of the United States during the same month (despite the fact that its economy is nearly ten times the size of our own). New jobs along with immigration form the two primary pillars of household formation, which in turn is the key driver of housing.


Continued low rates on mortgage interest, which represent one of the largest costs associated with owning a home, have also been a boon. The question is what will happen when interest rates start to go back. “Canadians have never been so indebted,” says Cooper. “(Rates) won’t stay low forever. They have already started to rise, which is why we recommend locking in at today’s low (levels).”


Cooper is particularly concerned about the fact that although the country has managed to side-step the major housing sector contractions that have hit other economies, we do not seem to be taking full advantage of the lessons. “There is much to be learned from the US experience,” says Cooper.  “Canada has weathered the storm well. But an overheated housing market could pose major problems in the future.” For example in the United States, average homes prices have fallen by more than 30 percent since the financial crisis, and close to 11 million US households are currently underwater on their homes (that is they own more than what they are worth).


Given their relatively high indebtedness and the importance of continued low mortgage rates, housing sector stakeholders are not surprisingly closely following the Bank of Canada, which has kept its policy rate extremely low (at 1.0 percent) for some time, and has promised to keep it there for the foreseeable future.


That said, the central bank gave a strong hint last week that it may be backing away from that commitment, notes Diana Petramala, an economist with TD Economics. “A more compelling argument has been building for the extraction of monetary stimulus,” notes Petramala. “But the pace of rate hikes will likely be gradual. We anticipate that despite the change in language in (its recent) announcement, rates will remain lower than normal for some time.”


Housing sector stakeholders are praying that she is right.





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