December 26, 2006


Blurb: Canadian house prices have been on tear. But residential real estate has been even stronger in other countries.


Does the Canadian real estate market still have legs?


By Peter Diekmeyer •


By all accounts Canadian house prices have been on a tear in recent years. Rising personal incomes, a strong job market and low interest rates by historical standards have led to a multi-year series of double-digit rises in property values across the country, particularly in Western provinces.


But in recent months, many of the fundamentals underlying the Canadian real estate boom have been looking less solid. Canada’s economy, particularly its export sector, looks to be under threat due to sluggishness south of the border. In addition, interest rates have also been slowly creeping up. To make matters worse, the rising prices are starting to make affordability an issue for many of those who are looking to buy their first home.


However, according to one expert, the housing boom is far from over. “The resale housing market still has legs,” said Gregory Klump, chief economist for the Canadian Real Estate Association. “Recent monthly declines in listings and the continuation of solid sales activity are keeping the markets tight.”


Housing starts and real estate prices

Although the Canadian real estate boom could well continue, future progression is unlikely to come as easily and as quickly as it has in the past.  Year-to-date existing home sales however continue to register strong performances. For example 27,630 homes were sold during November, a 1.5 percent increase over the previous month’s total. But even more important, retail housing activity so far this year is on pace with record levels set last year.


The strength in existing homes sales was also reflected in new home construction. For example on a seasonally adjusted basis, construction started on 225,000 new homes in November, up slightly from the 223,200 unit level recorded the previous month. On a year-to-date basis actual starts are up 1.3 percent from levels reached a year ago. That said, according to the Canada Mortgage Housing Corporation, a slowing Canadian economy and a corresponding fall-off in employment growth could slow housing starts slightly next year.


Sources of concern for Canadian real estate

One of the major sources of worry for Canadian real estate sector stakeholders has been the performance of the U.S. housing market, which has shown signs of reaching bubble territory in several regions.


That’s bad news, because many Americans have been taking advantage of their new found real estate by making equity withdrawals through flexible mortgage products such as Home Equity Lines of Credit and using the proceeds to finance current consumption. The fear is that if U.S. real estate, which is already showing signs of cooling off, slows too much, it could affect consumer spending, producing negative effects for Canadian companies which service the U.S. market.


Another source of concern is interest rates, which, although they have come down slightly in recent months, have been slowly drifting higher during the past few years. For example according to’s mortgage chart (,220&st=zz&c3d=False&web=can&cc=2&prodtype=M)

Posted variable open mortgage rates have climbed from below 4.0 percent in 2004 to about 6.0 percent today. True, fixed mortgage rates of longer durations have moved less during that time. However the trend is in the wrong direction.


On the other hand, experts say that the recent declines in housing affordability appear to be tapering off. “Going forward, affordability is likely to improve a bit across a number of markets next year as the lagged effects of fourth quarter mortgage declines, easing energy price pressures and a topping out of home price appreciation have positive effects for home buyers,” wrote Derek Holt, assistant chief economist at RBC Financial in a recent report.


Canadian homes reasonable on an international basis

The other good news for Canadian home owners is that while their property values have been increasing quickly, the price rises look fairly moderate compared to what is happening in other markets. For example according to the Economist magazine, which has been tracking the international real estate boom, Canadian house prices have risen by a stunning 69 percent during the period between 1997 and 2006.


However as impressive as this may seem, the jump pales behind the 100 percent increase recorded in the United States during the same period. In fact compared to the increases in residential real estate prices recorded in Britain (+192%), France (+127%) and Spain (+173%), Canadian real estate prices look positively tame. Indeed out of the 19 countries survey by the publication Canadian real estate price increases ranked 15th.


Of course homeowners should not be complacent. It is quite possible that real estate is overvalued in other markets. All one can say for sure, is that when looked at individually Canadian house prices look like they are going crazy. But when you compare them with those in other places, they don’t look so bad.



Recent Bank of Canada rate moves:


December 5, 2006, No change

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:


January 16, 2007
March 6, 2007
April 24, 2007
May 29, 2007
July 10, 2007
September 5, 2007
October 16. 2007
December 4, 2007



Peter Diekmeyer ( a freelance business and economics writer.






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