• The Canadian housing market remained well balanced in May with both sales and listings relatively stable in the month. Canadian existing home sales fell for a third consecutive month in May, edging down by less than one percent according to the Canadian real estate association. With listings relatively flat, the sales-to-new listings ratio was 52.5 in the month, basically unchanged from April’s 52.1.
• On a regional basis, the story changes. The weakness in sales activity was largely driven by a drop-off in sales in Vancouver and Ottawa. Vancouver sales have fallen for three consecutive months. On the flip side, sales in Toronto and Edmonton increased in the month – although bouncing back from declines in the prior month.
• The price of an average Canadian home increased 8.6% from year-ago levels to reach $376,871 in May.
Key Implications
• There has been a glut of new listings through most of this year. The result being sharp price increases, despite relatively weak demand. At the national level, home sales have fallen roughly 5.7% from levels reached at the start of this year. While CREA states that the majority of housing markets in Canada remain well balanced,
relatively tighter markets in Vancouver and Toronto continue to put upward pressure on prices. Home sales in these areas remain historically high, but have shown some signs of easing over the last few months.
• Overall, the Canadian resale housing market will likely remain well supported through most of 2011 by a continued low interest rate environment. Nonetheless, expect a more moderate pace of home sales and price action than was experienced over late 2009 and most of 2010. For one, the effects of tougher mortgage insurance rules put in place in mid-March will likely start to have a more noticeable impact on demand through June. Second, despite low interest rates, rising prices in certain cities – for example, Toronto and Vancouver – have led to a deterioration in housing affordability. Overall, we expect home sales to fall by 3% through
2011.
• In our view, home prices are roughly 10% overvalued, and the resale housing market is due for a soft landing. As interest rates begin to climb through 2012, a further deterioration in housing affordability will weigh on demand, and home prices are expected to fall 10% peak-to-trough. Housing weakness will be greater in Vancouver, where the overvaluation in the housing market is the greatest. Home prices in Vancouver are expected to fall 16% peak-to-trough in 2012.
• That being said, continued improvements in the Canadian labour market, and only gradual increases in interest rates will help the resale housing market avoid a “hard landing”.
