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February 25, 2014

 

Title: Housing bears will have to wait

Subtitle: Experts downplay record prices, weak economic data

 

Residential real estate prices continued their upwards climb last month. According to the Canadian Real Estate Association, the average price of existing homes sold during January rose by 9.5 percent to $388,553, compared to the same month last year.  The biggest gains were recorded in Vancouver and Calgary. Prices here are now roughly double what they are in the United States.

 

The good news is that financial sector economists, led by major players, such as the International Monetary Fund and TD Bank continue to see little cause for worry that a bubble may be forming. Although both institutions concede the housing sector is slightly overvalued, they estimate the overvaluation at just 10 percent. 

 

“Bears will have to continue to wait,” Benjamin Tal, an analyst at CIBC World Markets, wrote in a recent report to clients. “The market will eventually be tested by higher interest rates.  But as things stand now (they) are likely to remain low well into 2015.”

 

That said, there are signs that trouble may be ahead. For example homes sales fell by 3.3 percent between January and February. Housing starts also dipped during the month, to 180,200, on a seasonally adjusted basis, compared to 187,100 in December.  However as Derek Holt, and economist at Scotiabank notes, the sluggishness, which has created a drag effect on the economy so far this year, may be in part weather-related.

 

However, if you believe the Canada Mortgage Housing Corporation, things are unlikely to get much better anytime soon. The state owned mortgage loan insurance provider estimates that starts will stagnate for the rest of the year, at a slightly lower pace than in 2013.

 

Cooling foreign demand

The Harper Government, which to its credit, has been taking baby steps to push back against possible housing market excess, slipped further measures into its most recent budget. Earlier this month the government announced an end to the country’s Immigrant Investor Program, which essentially sold Canadian citizenships to wealthy foreigners, who have $1.6 million in assets, and were willing to provide the Canadian government an $800,000 interest-free, five-year loan. Ending the program, should calm residential real estate sector demand in Toronto, Vancouver and other similar areas where foreign demand had been bidding up prices.

 

As if that were not enough, both retail and wholesale sales slipped during December and the annual inflation rate rose from 1.2 to 1.5 percent. That last data point could prove crucial, as the Bank of Canada, which has been keeping interest rates low, closely monitors consumer prices, to make sure they remain in line with its target levels.

 

That said, there have also been some positive signs. For example the prices of both commodities such as gold and financial assets continue to rise. The S&P 500 hit a new record high this week and the S&P TSX is up sharply since the start of the year.

 

Whether these trends will be sufficient to continue to support Canada’s residential real estate sector, should become clearer in the months ahead.

 

peter@peterdiekmeyer.com

 

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