Title: Are house price declines overstated?

Sub-title: The Canadian residential real estate sector enters 2009 facing challenges. But there are some bright spots.


News on the economic front during recent weeks continues to be grim. Job creation in Canada has hit a wall, the country’s trade balance and household wealth are shrinking and industrial production is sluggish. In a sign of just how tight things are, the Bank of Canada recently cut its policy rate by 75 basis points to just 1 ½ percent, in order to boost economic activity.


With all of this bad news, it should come as no surprise that the residential real estate sector hasn’t done that well either. Yet amidst the gloom, two contrarian economists, Pascal Gauthier and Grant Bishop of TD Financial Group, argue in a recent report that bad news stemming from Canada’s housing sector may be overstated.  In fact the document is just one of several that have emerged in recent months which point to bright spots on the horizon.


Weaker housing starts and existing homes sales

First the bad news. There is no doubt that the Canadian residential real estate sector is in a serious slump. According to the Canada Mortgage Housing Corporation, housing starts fell sharply in November to 172,000 units on a seasonally adjusted basis, compared to 211,800 units the month before. Much of the drop stemmed from the more volatile multiple units category (condos and apartments) as well as from the fact that during the first couple of years of the decade construction activity was unsustainably high to compensate for pent up demand that had built up in the system. However the recent plunge was particularly sharp and brutal.


The other key indicator of residential real estate activity, existing home sales, isn’t doing that well either. According to the Canadian Real Estate Association, sales in major markets conducted through its Multiple Listing Service fell to just 27,743 units during November, the lowest level since January 2001. The longer listing times it is taking homeowners to sell their properties is forcing them to cut prices. In fact, the average price of homes sold during November fell by a sharp 9.8 percent, compared to the same month the previous year.


Bright spots on the horizon

However there are bright spots on the horizon. For one, as CREA’s president Calvin Lindberg is quick to point out, “We should not lose sight of the fact that the World Economic Forum labelled Canadian banks as the soundest in the world.” While this may seem like meek comfort, there are strong indications that Canadians are getting quicker and easier access to credit than consumers in the United States. This means that as bad as things are in the residential real estate sector, the floor seems much higher here than it does down south.


The other trend stemming from recent weakness in the residential housing sector, particularly in markets such as Calgary and Vancouver, is that affordability has increased measurably. For example the Desjardins Affordability Index, compiled by the Quebec-based credit union, which measures the proportion of income families spend on home ownership costs, has been slowly inching towards its historic average.


Another influential source regarding the state of home ownership, The Canada Mortgage and Housing Corporation’s recently released annual report on housing, also includes optimistic findings. Although the document chiefly looked at historical trends, the CMHC estimated that data from the 2002 to 2004 period show that “only 4.6 percent of Canadians lived persistently (all three years) in an urban household in core housing need.”


Price declines less sharp than once thought

However it is the findings regarding resale housing prices in the recent TD Bank Financial Group’s special report that provide the most interesting and potentially the most positive news. According to Pascal Gauthier, one of the report’s authors, “the large recent price drops in exiting home sales that have been announced by the Canadian Real Estate Association may be overstating the breadth of the decline.”


Gauthier argues that using the traditional average exiting home sales price calculations, large swings in key provinces can skew the overall results. For example existing home sales in British Columbia, where average prices are the highest in the country, were down by close to 50 percent during the year through October. When these data are included in the national totals, it makes things look worse than they really are.


“During normal times, the regional sales weighted price measurements are reliable,” says Gauthier. “However the same cannot be said, when markets are at a turning point and sales fluctuate significantly.”


In fact the Canadian Real Estate Association has more or less admitted as much. In its latest release, CREA showed that average house price declines during November were only 4.7 percent when the data taken into account the provincial proportions of privately owned housing stock, compared to 9.8 percent using traditional methods.


Sceptics would argue that if the average existing home sales price drops are not as bad as they seem, then it is also likely that the average increases of recent years may not have been as rosy as previously reported either. However according Gauthier, of the TD Bank Financial Group, the variations would have been far less, due to the fact that market shifts were less abrupt than they are presently.


Let’s hope he is right. Because right now, Canadian housing sector stakeholders can use all the good news that they can get.


Peter Diekmeyer is a freelance business and economics writer.






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