Today's economy

Canada’s invisible housing correction

By Kevin Press,

Comments (19)

After a solid sales report from the Canadian Real Estate Association, one economist says the likelihood of a housing correction is “much smaller now.”

Fears that Canada’s residential real estate market is headed for a downturn appear to have subsided following a positive June sales report from the Canadian Real Estate Association (CREA). Month-over-month resales (on a seasonally adjusted basis) rose for the fourth consecutive time in June. The Multiple Listing Service (MLS) Home Price Index is also up for the fifth straight month.

Canada’s invisible housing correctionI asked Robert Hogue, a senior economist at RBC Economics, if these numbers mean we’ll avoid a slump this year. “We’re not ruling out any major correction completely,” he told me. “I would say that the probability of this taking place is much smaller now than it might have been, say, five or six months ago. The recent developments in terms of home resales are indicating that things have not only stabilized but picked up a bit.”

A correction in the housing market could have a ripple effect on the broad economy in numerous ways. For example, lower housing prices often trigger a drop in consumer spending because homeowners recognize that their net worth has taken a hit. Unemployment can rise too, in construction trades and other areas of the economy related to the home improvement industry.

Highlights from the June CREA report:

  • Home resales rose 3.6% in June. That’s a particularly impressive number given resales jumped 4.4% the previous month. The second quarter provided a remarkable 6.4% gain relative to Q1. That’s the best quarter-over-quarter result we’ve seen since 2010. Sales have now rebounded to the level they were before last year’s move by the federal government to tighten mortgage lending rules.
  • Demand and supply remain in check. The sales-to-new listings ratio reached 0.54 in June. That is well within the 0.4-0.6 range experts consider a balanced market. The ratio was at 0.52 in May.
  • The national composite MLS Home Price Index is up over last month, albeit just slightly. The index measured an annual rate of increase of 2.3% in June.
  • Month-over-month resale figures rose across the country. Vancouver is up 6.4%, Edmonton 10%, Calgary 0.8% (a low number likely due to the flooding), Regina 5.3%, Saskatoon 15.8%, Winnipeg 7%, Toronto 0.9%, Ottawa 2.3%, Montreal 3.4% and Halifax 2%. No month-over-month declines were reported.

Hogue told me that while RBC Economics did not predict a 2013 correction, “we did and still do forecast a moderation in residential investment,” he said. “This is a component of the Canadian economy that will not contribute to growth this year.”

Of course, interest rates will figure in how all of this plays out. In his monthly housing update, Hogue wrote that higher rates in the second half of next year “will exert some downward pressure on the market.” Don’t count on big year-over-year gains in the price of your home anytime soon.

More on buying and selling your home:

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Helmut S. Lenko on

Helmut in Vancouver, Canada:
Bought my 1st BC house in 1967, and have never looked back: with a partner , we accumulated 14 revenue houses
in short order, and always improved them. They are worth more than gold, and have appreciated in the last year by over 10%, never mind what all the previous negative comments are! You don’t know what you’re talking about….

    Naidu on

    Just wait and see my Friend – you seem to be over enthusiastic – the same with a lot of people like you.

Ian on

Eventually the houses will be passed on from the baby boomers to the millennials. Whether this is now or 15 years from now doesn’t matter. When this happens, the buyers will have all the upper hand. There will be no bidding wars. People will pay what the houses are worth (i.e. a lot less than what they are going for now).

    Ron Jackkernaba on

    There will be not correction as home prices will continue to rise. There are very few cities in Canada with a ridicutlous amount of land not inhabitited. Both Canada and the U.S. should be building new cities, new green cities.

Ian on

Timing the market works marvellously…for those who can do it well. There is no doubt that the markets are overvalued. The question is what factors are contributing to the overvaluation, and when they might change. We have a first wave of the millennials now entering house purchasing age. This first wave represents the dumb (impatient) idiots willing to pay 8-10 times their annual income on a house. Once this first bold wave exhausts itself, there will be more baby boomers looking to sell, and a 2nd round of (more prudent) buyers entering into the market. This 2nd wave will hopefully experience higher down payments and higher interest rates. Hopefully, they will be less concerned with the rate based ‘affordability’ and more on the actual value of the house. The crash will come at a time when it hurts the most (i.e. when baby boomers on mass are looking to liquidate assets to retire). If you think we have a retirement crisis now, wait till boomers’ ‘house rich’ investment portfolios tank. I am 30, but I can (and will) wait forever (if necessary) for prices to normalize to 3.5 time the average annual income

    Ian on

    Another consideration is this….forced & panicked selling will take place. The average Canadian is drastically short of retirement goals. If there is any fear that the market will drop, more retirees will look to liquidate in order to get out early. People will sell when a crash hurts the most.

Atul Prakash on

The house must be viewed as a place to live in. It automatically grows in value based on the increased land transfer tax, increased property tax, inconsistency of available affordable housing for new comers and the pulls & pressures to buy and sell by Real Estate Brokerages.
For a leveraged investment of this magnitude there are better ways to grow money in other asset classes. I guess the pressure on a house to grow as an income generating asset is too excessive in Canada. If only people look outside the box. They are living with blinders on their eyes!

jmc1989 on

There will be no major correction. The market corrects itself all the time. History shows housing prices have consistently been a sound investment. A big factor on the depreciation of your home, when a correction takes effect, depends mostly on where you live. The global economy is coming out of a recession, so if anything, people will have more disposable economy, more jobs, more opportunity. You old folks also forget that there are still plenty of young people who can invest in the lower part of the market and middle age folks who will use their equity and move up. The people commenting above try and time the market and history shows that timing the market will leave you with lower returns.

robert smith on

what the market dictates is a fallacy, all it takes is a moderate spike in interest rates, higher unemployment figures and a little earthquake/flood and sure enough these boxes will go back to what they’re really worth

Oracle on

with consumer personal debt at a all time high mainly due to the fact wages have not gone up for years.
Combine that living costs having gone through the roof and its clear something is going to happen.
Only needs employers to start laying off workers in their hundreds and Canada’s housing market will go into a tail spin.
I got out of owning in 2009 because I could see the market overheating, people are paying way too much for what is essentially a roof over their head and it could well push them into bankruptcy when the main breadwinner loses their job.
Combine this with the move towards temporary employment contracts and you have a recipe for disaster.

BazG on

If an expert has a vested interest in selling houses, his opinion on this matter should be viewed with skepticism.

Ron Tomyn on

Crash and burn! The sooner the better. No one can afford this insanity!

    NA on

    All the foreign investors propping up this market can. But only they can. Homebrew Canadians can’t.

      jmc1989 on

      Really? Because the last time I checked the government didn’t even take a record of this. They do know, though, who buys for purely investment reasons, which is really all that matters. So, who are they, the “foreign” investors you speak of; what percentage of the market do they take up?

Gerard on

Hmmm, in the spring realtors compare monthly figures to the previous month, in the fall they compare them to the same month last year.

7th Sense on

Ironic how we call it ‘correction’ but still hope that it’s deferred indefinitely! We want the ‘flawed’ market to prevail!

Doug on

Pay attention to the direction of interest rates and the rario of consumer debt to net income. A surprise is coming in the housing sector.

Ray on

One word: seasonality. At the end of the “housing season” everyone feels good about the state of the market. Then comes the next leg down. Just look at the year after year pattern during the crash in the US housing market… it’s the same thing. The bloodbath is about to start as we enter fall.

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