March 18th, 2008
Title: Housing data paint mixed picture
Sub-title: Starts are up, but existing home sales are down.
While recent residential real estate indicators are almost all pointing south, the picture here has been more nuanced. For example Canadian resale housing activity fell during February, yet housing starts increased.
The price data isn’t much clearer: the cost of new housing in Canada has accelerated, while selling prices of existing homes registered their smallest increase in more than three years. The big question for housing sector stakeholders is what this contradictory information means. Will Canada’s red hot housing market finally cool down as many observers have been expecting?
One long-time industry watcher says yes. “Canadian home sales are now firmly below year ago levels, another sign that the Great White North’s housing boom is grinding to a finish,” comments Douglas Porter, an economist with BMO Capital markets. “Dismal weather may have exaggerated the weakness in the opening months of the year, but there are more durable factors to suggest the bloom is off the boom.”
Sales down, starts up, affordability slips
Existing homes sale statistics suggest that Porter may be right. According to the Canadian Real Estate Association, the number of homes sold in major markets via its MLS system fell by 6.4 percent during February compared to the same month last year. Furthermore, the average selling price of those new homes increased by just 5.3 percent on a year-over-year basis to $327,477, the smallest jump since November 2004.
On the other hand housing starts increased to a seasonally adjusted rate of 256,900 units in February, from 227,700 units the previous month. That said, this increase is far less impressive when you consider the fact that much of the jump is related to condominium starts, which tend to generate less economic activity than single family home starts.
The increase in new home starts may have been motivated in part by the prices that builders are getting for the homes that they are putting up. According to Statistics Canada, during January, the cost of new housing accelerated for the second consecutive month. The prices that contractors charge for new homes increased 6.5% during that month, compared to January 2007. The jump, as well as the 6.2 percent gain in December, marked the end of 16 straight months during which gains in new housing prices had been coming down.
While much of the recent housing sector data has been mixed, affordability data have been steadily worsening. This month, RBC released its latest assessment, which concluded that the picture is getting grimmer for Canadians trying to get into their first homes or to hang on to exiting properties.
“Nationwide housing affordability deteriorated in every consecutive quarter throughout 2007 to end up at its most unaffordable level since the housing bubble peaked in 1990,” wrote RBC’s assistant chief economist Derek Holt, in a letter to clients earlier this month. “The lagged effects of higher fixed mortgage rates continue to be a significant (reason).”
Will U.S. turmoil affect Canada?
Another cause for worry among Canadian housing sector stakeholders relates to continuing uncertainty regarding events south of the border and the extent to which U.S. economic sluggishness could spill across the border. U.S. house prices continue to head south and tightness among the country’s lenders isn’t helping. True, the Federal Reserve did cut its policy rate by 75 basis points earlier this week (Tuesday). However according to one expert, the extent to which such cuts influence mortgage rates is increasingly open to question.
According to Beata Caranci, director of economic forecasting at TD Bank Financial Group, as of early this month, U.S. adjustable rate mortgages (ARMs) had came down by only 47 basis points since the start of the year, despite the fact that the Fed brought down its policy rate by 225 basis points. “There is very limited benefit to be had from further fed cuts for these owners,” said Caranci. “Once the short lived impact from fiscal stimulus dissipates, the U.S. economy could relapse in early 2009.”
What this means for the Canadian housing sector isn’t clear. “Dismal weather may have exaggerated the weakness in the opening months of the year, but here are more durable factors to suggest that the bloom is off the boom,” comments Porter. “Sagging affordability and the likelihood of increased consumer caution point to a calmer housing market conditions throughout the rest of 2008.”
Porter is not alone in thinking. His view is shared by many observers, including both the Canada Mortgage and Housing Corporation and the Canadian Real Estate Association. That said, many of the same experts also predicted such a slowdown throughout much of last year too. Yet we are still waiting.
Peter Diekmeyer (email@example.com) is a Montreal based freelance business and economics writer.
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