June 12th, 2007 

Blurb: Experts keep predicting that Canada’s housing market will slow. But when?

 

What housing slump?

 

By Peter Diekmeyer • Bankrate.com

 

As pretty much any homeowner can tell you, Canadian real estate has been on a tear for years now. However in recent quarters, many economists have concluded that the sector will settle down. Chances are they probably right. But just when that will happen remains an open question.

 

“Short-term cyclical factors are consistent with a gradual cooling off in Canada’s housing market over the next several years,” commented Adrienne Warren, an economist with Scotiabank, in its Real Estate Trends report. “Longer-term demographic trends are also generally softer, but carry important implications for housing preferences by dwelling type and location.”

 

Warren argues that after an unprecedented eight straight years of increases, which have boosted the value of the average Canadian home by more than 50 percent (even after inflation adjustments) the sector is due to take a breather. Slowing population growth, rising affordability challenges and the apparent difficulty that some immigrants have in becoming property owners, are among the reasons cited.

 

Recent indicators look pretty good

Of course Scotiabank is not alone in calling for an expected cooling in the housing market. Numerous other economists have made similar calls. These generally make sense, after all things cannot go up indefinitely. That said, timing these sorts of forecasts is notoriously difficult.

 

For example just a couple of days  after the Scotiabank report came out, the Canada Mortgage Housing Corporation announced that housing starts rose to a seasonally adjusted rate of 229,700 units in May, up from just 211,900 in April. True, housing starts are still down by 3.8 percent on a year-to-date basis and much of the increase was concentrated in the more volatile multiple units segment. But the strong May numbers were a bit of a surprise.

 

Furthermore housing starts data were not the only positive signs on the horizon. Earlier this week, Statistics Canada released its New Housing Price Index, which showed that contractors’ selling prices have shot up by 8.9 percent compared to 12 months ago.  

 

Existing home sales and cottage demand up

Sales of existing homes are also continuing briskly. According to the Canadian Real Estate Association, during April, records were set in terms of sales activity, average prices and dollar volume of transactions made by its members in major markets across the country.  For the first time ever, the average price of homes sold shot through the $300,000 barrier to $305,542, an increase of 9.3 percent compared to the same period last year.

 

In fact the new data come on top of surprisingly strong statistics for the year so far. “Resale activity in the first quarter was far stronger than anybody had anticipated,” commented CREA’s chief economist Gregory Klump, last month. “Record breaking sales activity in the first three months of this year has forced (us) to revise our forecast upwards.”

 

Not surprisingly, much of the increases came in Western provinces, particularly the red-hot Alberta market. “Anecdotal evidence suggests that resale housing activity in Western markets is being boosted by a shortage of lots and by buyers who are ready to move up but don’t want to wait for a newly constructed home to be completed,” said Klump.

 

Nothing it seems will keep brick-hungry Canadians away from new or upgraded properties. For example, according to one real estate firm, although high gas prices this year are causing many vacationers to pare down the number of trips they make to their cottages, this hasn’t necessarily showed up on the price front.

 

“Our research reveals that demand for recreational property continues to far exceed supply across Canada, causing prices to rise at a much quicker rate than the overall housing market,” commented Phil Soper, president and CEO of Royal LePage Real Estate Services. According to the firm’s data, a standard waterfront property with land access shot up by 13 percent in value last year and typical cottages in the Ontario market now trade in the $500,000 range.

 

The challenges of long term-forecasting

Of course none of the new data contradict the Scotiabank report’s conclusions, most of which dealt with long-term macro-economic trends. Longtime watchers will tell you that economics is an imprecise business and that markets can remain wrong much longer than you can remain solvent.

 

However two things are certain right now: the real estate market will slow eventually and that no one can tell you which month the tipping point will occur. And one last thing: when the housing market does slow, there are a lot of economists who will be able to claim that they saw that one coming from a mile away.

 

Peter Diekmeyer (www.peterdiekmeyer.com) a freelance business and economics writer.

 

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