Sunday, June 29, 2008

Canada's housing market shows shades of U.S.

After months of holding fast to the view that Canada will not follow the U.S. into a housing decline, one economist is now raising the specter of an overall drop in prices north of the border.

Canadian home sales are down 13% year over year so far in 2008 and price appreciation has slowed markedly to a year-to-date gain of 1.8%.

When charted out, these data suggest Canada is tracking the U.S. housing market fairly closely, at a two-year lag.

It's a bit unnerving to see how Canadian performance is beginning to look like that of the U.S. two years down the line.

In the past 10 years, the average price of a detached, two-storey home in Canada has risen 129%.

However, this year, sales are down, listings are up, and while prices have mostly stayed in positive territory, a few markets have showed signs of cracking.

Last month, three markets posted slight year-over-year declines in house prices - Calgary, Edmonton and Windsor-Essex.

In the West, the declines look like modest corrections to markets that got ahead of themselves.

More concerning is weakness in cities where economic fundamentals are much less stable, such as Windsor and Thunder Bay.

The most interesting question is what will happen to the middle ground. Will cities like Toronto, Montreal and Ottawa, which have fairly robust markets but have not been blessed by a booming underlying economy, end up seeing home price declines, too?

Economic fundamentals, including strong job growth and low interest rates, suggest that Canada is still in pretty good shape, and that declines in this "mass of cities" have an outside chance instead of a probability.

Thus far, Canada is not even close to experiencing the 8% price drop and 20% decline in existing home sales that has taken place in the U.S. this year, but that doesn't mean there is no cause for concern.

There are a litany of reasons why the Canadian market is different. But even a very pale version of what we saw in the U.S. would not be good news.


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