April 2013


Title: Is residential real estate bottoming?

Sub-title: Much will depend on the new Bank of Canada governor’s policies.


After a wobbly couple of months which followed last year’s introduction of new lending rules by Jim Flaherty, Canada’s finance minister, there are signs that the country’s housing sector is stabilizing.


Existing home sales in Canada fell by 15.3 percent during March, however they rose slightly (2.3 percent) compared to the February totals. Average selling prices, as measured by the Canadian Real Estate Association, did even better, rising by an impressive 2.5 percent to $378,532, compared to the same period last year. The National Bank of Canada’s Teranet’s index of selling prices also recently rebounded following several months of declines.  


“This reinforces our view that Canada’s housing market is in the process of stabilizing at lower levels,” said Robert Hogue, a senior economist at RBC in a recent note to the bank’s clients. “We continue to expect that demand for housing will weaken slightly in 2013, pulled down by somewhat strained affordability, concerns about household indebtedness and global uncertainty.” Hogue however believes that fears of a major correction are overblown, due to steady employment growth, low interest rates and continued population gains.


If Hogue is right, that would be great news for Canada’s housing sector, which is one of the few in any major global economy to barely feel the pinch from the 2007-2008 financial crisis and ensuing recession.


As Mark Pinsonneault, an economist with National Bank Financial notes, the total value of US housing sector wealth is 6.6 times that of Canada’s, however America’s population is nine times ours. “In other words, on per capita basis, Canadian households owned more housing wealth than did US households,” said Pinsonneault. 


How things play out will in large part depend on the Bank of Canada’s interest rate policies. This week, Mark Carney, the bank’s governor reiterated his long-held position that the next move will likely be upwards. That’s important because interest payments are the largest home ownership cost and any move to increase them would have a direct affect on prices. That said, Carney is in his last days on the job and will be leaving shortly to take on a new gig as head of the Bank of England.


As Avery Shenfeld, chief economist at CIBC World Markets notes, what matters more for future Canadian central bank policy is who will replace him. An announcement is expected in the next few days. “With that will come quick but ill-informed speculation about whether the new head will be more hawkish or dovish than Carney,” said Shenfeld, who notes that, unlike in other countries, candidates’ economic bents are murky at best. “Inside candidates at the Bank of Canada have been unable to express their personal views and outside candidates are unlikely to have published anything specific to today’s circumstances.”


In short, the answer as to whether Canada’s housing market will be stabilizing over the short term, likely lies in Ottawa.




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