Sunday, June 29, 2008

Canada's Housing Boom Over

A year or so ago, selling a house in most of Canada's major markets was not a significant challenge. If you lived in a city with a strong economy, the selling price was heading in one direction only - straight up, usually in double-digit leaps every year.

But the most recent reports suggest the boom times are over.

Prices have already begun falling in Calgary and Edmonton after a couple of years of breakneck growth, and prices for the country as a whole were up just 1.8% year-over-year in May. Between the beginning of January and the end of May, 202,899 homes had been sold nationwide through the multiple listing service (MLS) compared with 233,213 in the same period last year - a drop of 13%.

It as a move towards a more balanced market, but with new listings coming in at a pace more than double the number of houses sold, analysts say it is clear that a slowdown has begun.

The combination of significantly higher listings, reflecting the desire of homeowners to take advantage of the past increase in prices, and weaker demand, due to the past erosion in affordability, are leading to declining sales and softer price performance across the country, but particularly in the west.

It all comes down to a simple matter of supply and demand. On the supply side, past price performance has strongly encouraged additional supply in both the new and existing home markets. Housing starts averaged a strong 234,000 units in the first quarter. While we expect new home construction activity to remain robust, starts should gradually edge down to a lower level of around 200,000 units over the course of the next 18 months.

We had anticipated an increase in new listings as a result of solid price gains in the last couple of years, but the recent surge in new listings has been far greater than anticipated. The jump in supply of homes for sale is assuredly an attempt to take advantage of the past home price appreciation on the part of homeowners and real estate investors.

The Canadian situation is far different than that in the U.S., where the housing market is in full retreat and prices are plummeting in a number of major markets.

It should be stressed that the rise in listings does not reflect homeowners of principal dwellings desperate to sell, and this is the dominant difference between the Canadian and U.S. experience.

In Canada, speculators may be quickly dumping properties on the market to get out while the times are good, but individuals that have a principal dwelling are not under financial duress. This distinction is crucial to evaluating the impact of weaker home price performance on personal wealth and consumption. Canadian consumers are also nowhere nearly as leveraged through their home equity as American consumers are.

There can be no doubt that housing prices are due for a correction in Canada, with the country's economy growing wobbly and prices in several markets peaking after six years of rapid growth.

Nationally the average house price increased less than 2% year-over-year in May. We are getting close to slipping under water. I expect to see negative growth figures at least for the next few months. Housing markets have a lot of inertia. Once they start to move they can go in that direction for several years. The market was flat on its back for most of the 1990s.

Looking ahead, flat sales and prices "may be the best-case scenario, at least for the next year or so. The Canadian economy is anemic and it will probably be like that for the rest of the year.

Canada's housing boom is getting long in the tooth. "It has been with us for six years running. We have already seen prices start to fall in Edmonton and Calgary - cities where the prices rose too rapidly. And they are down in Windsor because of that city's economic slump.

Given that Canada's economy is weakening there is room for prices to decline further. But, there is little chance of a U.S.-style bust in Canada. Our housing market is on a firmer foundation.

Nor does it mean that Canadians should rush to sell their homes. Owning a home generally makes more sense than renting. But as for investment properties, we probably wouldn't recommend it.

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