August 25, 2014
Canadian housing holds up
Despite continued predictions of weakness existing homes prices continue to rise
Canada’s housing sector continued to generate attention in recent weeks, as stakeholders cheered on progress. However several key economists have issued hints that the party may not go on forever. This in turn could affect both overall growth and employment, particularly if interest rates, which have been underpinning much of the market’s recent strength, start to inch back up.
“Residential real estate has been a notable underpinning to Canada’s economy,” notes Benjamin Tal, an economist at CIBC World Markets. “The current boom in prices comes as the home ownership rate has crept steadily higher. With the latest reading near 70%, a large majority of Canadians are now direct beneficiaries.”
Vancouver and Toronto still lead
The gains reaped by Canadian homeowners have been stunning, with prices nearly doubling during the past decade alone, this despite a significant dip during the financial crisis and ensuing recession. That trend continued in July, during which the average price of homes sold via the Canadian Real Estate Association’s Multiple Listing Service increased, by five percent to $401,585, compared to the same month last year. As usual the gains were concentrated in the red hot Toronto and Vancouver markets. With those markets excluded average prices in the rest of Canada increased by just four percent to $327,988.
Building activity not surprisingly picked up as well, partly in reflection to the increased demand. The six-month moving average of housing starts in Canada increased to a seasonally adjusted annual pace of 189,784 units, compared to 185,952 units the previous month.
RBC raises forecasts
The stronger than expected activity in recent months, led RBC Economics to raise its forecast of home re-sales in Canada to 467,200 units for 2014 as a whole, 2.1 percent increase from the previous year. However Robert Hogue, a senior economist at the large financial institution warned of intensifying downward pressures in the Canadian housing market going forward. “We believe that current historically low interest rates are not sustainable,” wrote Hogue, in a recent letter to clients. “We expect rising rates to erode housing affordability which is already stretched in some markets.”
Tal agrees, forecasting that Canadian household interest rate costs will likely rise by 100 basis points by the first quarter of 2016. This would cost them an additional $18 billion in interest costs at today’s debt levels. Hogue’s and Tal’s comments come on the heals of a cut by the Canada Mortgage Housing Corporation in its forecast of housing starts, which it says will head lower, as builders reduce inventories, rather than build new homes.
How these trends play out is anyone’s guess. International forecasters ranging from the Economist magazine, to major European banks and global financial institutions have long warned that Canada’s housing market was overvalued relative to local rents and incomes. However so far, prices have remained stubbornly stable.
Given housing’s role in the country’s economy there are a lot of Canadians who are hoping that that will continue.
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