September 11th, 2006 

Blurb: The Canadian economy has been running slower than expected. But don’t count the housing market out just yet.

Canada’s economy is chugging along, so real estate should too

By Peter Diekmeyer •
Those who follow Canada’s residential real estate market know how closely linked house prices are with the health of the overall economy. That’s good news, because despite some bad news coming from south of the border, Canada’s economy appears to be chugging along just fine says one of Canada’s preeminent economists.
“Canada remains vulnerable to developments in the United States, which is its largest trading partner,” said Pedro Antunes, director of national forecasting for the Conference Board of Canada, during a recent day-long seminar on the country’s economic prospects. “And although U.S. growth is expected to slow, personal disposable income here should continue to grow strongly.”
The Conference Board is a not-for-profit organization, which subsists by conducting research on behalf of private and public sector clients. As a result of its independent status, its forecasts tend to be more credible than those of analysts who have vested interests in being cheerleaders for their particular industries.
According to Antunes, the Canadian economy’s continued strength is due to strong domestic demand, a reduced tax burden and a strong loonie, which will likely force the Bank of Canada to keep interest rates down during coming months. However the Conference Board recently revised downward its forecast of Canadian GDP growth to 2.7 percent for 2006 and to 3.1 percent for 2007, in large part due to Canada’s deteriorating trade performance with the U.S.
Existing home sales expected to peak in 2006
That said, the downward growth estimate revision is unlikely to be overly serious for Canada’s housing sector. According to a Canadian Real Estate Association forecast, existing home sales are expected to hit 483,265 units this year, an all time record. The average price of a home sold via the organization’s Multiple Listing Service is expected to spike a sizzling 11.4 percent this year.
Although third quarter sales were down slightly, -- by 2.5 percent, compared to the same quarter last year, the value of the average house sold over the network rose to an impressive $294,245, up by 10.1 percent from the same quarter last year.
However housing sales are then expected to return to more normal levels next year according to CREA’s most recent forecast. Resale sales are expected to fall by 4.8 percent in 2007 and the average price rise during the year is slated to come in at a more modest 6.0 percent, in part due to calmer activity in the red hot Alberta and British Columbia markets. “The large price gains in the Western market will begin to shrink next year as housing markets in those provinces become more balanced,” said Gregory Klump, CREA’s chief economist.
So are house prices fairly valued?
The big question right now for home owners, potential buyers and other industry stakeholders, is whether Canada’s house prices continue to be fairly valued. One indication is housing starts, which according to the Canada Mortgage Housing Corporation, fell slightly in September to 211,300 units, on a seasonally adjusted basis.
However the news is not nearly as bad as it seems. In fact for the first nine months of the year, total starts in Canada actually increased by 1.2 percent from the same period a year ago. In fact a tapering off in new home construction, would be perfectly in line with the Conference Board’s forecast of a slight economic growth slowdown.
According to one expert, housing affordability and accessibility, though tightening, continue to be fairly broad based. “Although central bank rates have risen considerably, long-term bond rates and mortgage rates have not been affected nearly as much,” said Bernard Dorval, co-president of TD Canada Trust. “In addition we are also seeing several new lenders aggressively entering the market.”
However by one key metric, Canadian house prices do look as though they are moving slightly out of line. According to Adrienne Warren, an economist at Scotiabank Group, rising home prices, combined with the gradual upward tilt in mortgage rates, are making it more economical to rent property as opposed to buying it.
Warren estimates that the difference between a typical monthly mortgage payment on an average Canadian resale home and the average rent on a two-bedroom apartment has risen to more than $800. That’s up from $575 last year and from just $275 in 1997. In fact the affordability gap between the two competing choices is the highest that it’s been since 1990.
The rent-buy measurement is crucial, because the higher the gap rises, the less inclined Canadian will be to buy, as opposed to renting their properties. And that can only mean one thing: sooner or later, Canadian housing demand is bound to taper off.


Recent Bank of Canada rate moves:

October 17, No change
Sept. 6, No change
July 11, 2006, No change
May 24, 2006, +1/4%, 4 ¼% 
April 25, 2006, +1/4%, 4.0%
March 7th, 2006, + 1/4%, 3 3/4%
January 24, 2006, + 1/4%, 3 1/2%
December 6, 2005 + 1/4%, 3 1/4%
October 18, 2005 + 1/4%, 3.0%
Sept. 7, 2005 + 1/4%, 2 3/4%
October 19, 2004 +1/4% 2 1/2%
September 8, 2004 +1/4% 2 1/4%
April 13, 2004 -1/4% 2%

The Bank of Canada’s rate announcement schedule.

December 5, 2006  

Peter Diekmeyer ( a freelance business and economics writer.






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