July 31, 2012
Home prices in Canada continue to find support
Chief Economist, CanaData
In a world economy gone mushy mainly due to Europe’s Euro angst, Canada is continuing to make some headway, but it’s been tough slogging.
External demand for our commodities isn’t providing the support for growth that it has on occasion in the past.
As long as the U.S. keeps moving forward, however, we’ll probably be okay. But there is one other worry that keeps cropping up in discussions about our future.
It’s a possibility that has even been mentioned specifically by Mark Carney, Governor of the Bank of Canada – a too-rapid deterioration in the housing market.
This would have two components: a sharp decline in prices and a steep drop in housing starts.
That’s why the latest housing statistics are watched with such interest.
Even a worst-case scenario for housing in Canada, however, is not likely to yield anything like the catastrophe experienced by the sector south of the border.
U.S. home starts have been dead in the water for seven years. They collapsed from 2.2 million units annualized at their peak in early 2006 to below 500,000 at their bottom in early 2009.
They currently stand slightly above 700,000 units, with indications that a gentle upward shift is finally underway.
The U.S. housing crisis was more than a cyclical phenomenon. It was part and parcel of systemic problems in the banking sector.
It came about because too many low income earners were enticed into home ownership by sub-prime and variable-rate mortgages. Those borrowings were bundled into debt instruments that were sold between financial institutions with the promise they carried Grade A credentials.
It was a rickety house of cards with no foundation. It brought down mortgage insurers, plus private and public (e.g., Fannie Mae and Freddie Mac) financial institutions, and it heaped discredit on rating agencies. It also served to expose the risks of such esoteric practices as derivatives trading and interest rate swaps.
Regulation in Canada has historically been more restrictive and incisive. As part of our culture, our banks are more conservative. Investment banking activities – where the greatest risk-taking occurs – are undertaken by divisions within our commercial banks. In the U.S., the independent investment banking sector was wiped out, although that hasn’t stopped the carnage from spreading to the larger deposit-taking banks (e.g., JPMorgan’s recent hedging miscalculations).
If the recent past has taught us nothing else, it’s that complicated financial dealings can head south faster in more unexpected ways than may seem possible.
However, imagining such a turn of events for Canada is engaging in morbid speculation strictly for the frightening chill of it all.
There may be a moderation in Canadian home prices, it’s true, but the adjustment isn’t likely to be much more than 10% at most. (The decline in the U.S., peak to trough, has hovered near 33%.)
Canada’s healthy labour market will provide a backstop to housing demand. The unemployment rate nation-wide is now only 7.2%. ..d That’s not shabby, considering that even when the economy is performing at maximum capacity, the percentage of idle workers rarely falls below 6.0%.
All of the foregoing is preamble to a discussion of the latest figures on home prices, both existing and new.
For May, the Canadian Real Estate Association (CREA) reported a 0.3% year-over-year decline in average resale prices. There was considerable divergence between regions.
The largest decline in prices occurred in Vancouver, -11.9%. In the spring of last year, there was a speculative surge in purchases at the highest end of the market.
With the waning of that activity this year, average home prices have softened considerably. That’s not to say, however, that Vancouver is a bargain for buyers.
The average price tag for a resale home in Vancouver is now at $732,736, still by far the premium level for the country. It exceeds second place Toronto ($516,787) by 42%.
In the spring of last year, however, the price differential was 71% – $831,555 in Vancouver and $485,520 in Toronto.
The two other cities with notable year-over-year price declines in May were Victoria, -4.0%, and Saint John, N.B., -3.7%.
As for the actual dollar amount of average sales prices, Victoria ($506,195) has slipped into third place behind the largest housing market in the country, Toronto.
Toronto resale home prices have been holding up astonishingly well, +6.4% year-over-year. The strength in the resale market – often driven by empty nesters who are rearranging their accommodation needs – is helping to fuel a condo building boom.
Any taxi-cab driver will tell you that visitors to the city are amazed by the number of building cranes dotting the skyline.
Several other cities across the country have maintained healthy existing home price increases, including Halifax (+7.5%), Winnipeg (+7.2%) and Hamilton-Burlington (+7.1%).
Edmonton (+4.7%) and Calgary (+3.2%) have also recorded good year-over-year advances. The average resale home price in Calgary, however, remains nearly one-quarter higher than in the province’s capital.
Statistics Canada’s new housing price index (NHPI) for May was even more upbeat. It recorded a 0.3% increase month to month – versus +0.2% in April – and a year-over-year gain of 2.4%.
In annual terms, there were a couple of declines, but they were confined to Victoria (-0.9%) and Vancouver (-3.2%).
In the important Toronto market, the year-over-year change was a nation-leading +5.5%.
There were three other urban centres with percentage increases well above the national average –Winnipeg (+4.4%), Regina (+4.3%) and Quebec City (+3.2%).
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.
