Housing Market Up 8.6%

Canada's housing industry showed signs of life in February after several months of declines, with resales rising 8.6% from January thanks to lower mortgage rates and prices, the Canadian Real Estate Association reported Monday.

Despite February's gains, sales are still down 31% year over year, as are prices, which have fallen 9.2% in the past 12 months, CREA said.

Still, atotal of 28,669 homes changed hands in February on a seasonally adjusted basis via the industry group's Multiple Listing Service. It is the first month-to-month uptick in home-resale activity since September 2008.

"Typically, the spring market we're moving into generates more activity, and this year there are the benefits from historically low mortgage rates and improved affordability in most markets," said CREA president Calvin Lindberg.

CREA cautioned that listings remain high, although the number is trending lower, with 65,060 units listed for sale in February, down 10.9% from the same month a year ago.

"The housing supply is expected to continue easing, but it will take time before it realigns with lower demand," said CREA chief economist Gregory Klump.

"Economic uncertainty is keeping home buyers in a cautious mood, so homes are taking longer to sell than in recent years. Lower sales activity at the higher end of the price spectrum will keep the national MLS residential average price under downward pressure."

The national average price for home sales via the MLS was $281,972. Canada Mortgage rates, meanwhile, are near historic lows. On Friday, for instance, TD Canada Trust lowered its seven-year fixed mortgage rate by 0.2 points to 6.8%.

CREA said February's 9.2% annualized price decline is smaller than year-over-year drops posted in the past four months and is the first time the pace of decline decelerated since turning negative in July 2008.

"The report does offer some hope that the decline in Canadian home prices may have stabilized somewhat in February after appearing to have accelerated in the latter months of 2008," said TD Securities economics strategist Millan Mulraine.

"Not surprisingly, the biggest decline in prices were in Calgary (down 10.8% year over year), Greater Vancouver (down 13%), and Windsor (down 15.7%). However, prices in Toronto (down 5.4%) were also lower, while prices in Montreal (up 2.2%) and Quebec City (up 9.3%) continue to rise, albeit at a more modest clip," Mr. Mulraine said.

Cut interest rates

The Bank of Canada should cut interest rates to a record low next week to stimulate the economy, a panel of private-sector economists said Thursday as evidence of a deepening recession - globally and in Canada - mounted, including a major drop in Canadian home sales and home prices.

The C.D. Howe Institute panel called for a further half-point cut next Tuesday in the bank's trendsetting target rate to one per cent. One of the 10 members called for a full-point reduction, and another for a whopping 1.25-point drop to just 0.25 per cen

The half-point recommended by the panel would likely trigger a matching cut in the chartered banks' blue-chip prime rate - to which business and consumer floating-rate loans, including mortgages, are tied - to three per cent from an already all-time low of 3.5 per cent.

The need for further housing-market stimulus was highlighted by the Canadian Real Estate Association, which reported that home sales in December fell 1.8 per cent from November to their lowest level since 2000.

And the average price of a home plunged 11 per cent from a year earlier in December, and was down for the year as a whole, ending the nine-year housing boom of steady price gains.

"Average prices will remain under pressure during the Canadian economic recession," warned association chief economist Gregory Klump.

"There has been a fundamental shift in consumer confidence, with job insecurities prevailing in every region Canada. That is unlikely to change until the worst of the recession is behind us."

The industry association appealed to the federal government to include measures in its Jan. 27 budget to stimulate housing, including an increase from $20,000 to $25,000 in the amount homebuyers can draw tax-free out of their RRSPs for a down payment, and expanding the provision to include more than just first-time home purchasers.

However, association president Calvin Lindberg cautioned that "moderating home prices in Canada should not be confused with the downturn in the U.S. housing market" that pushed that giant economy, and in turn the global and Canadian economy, into recession.

The U.S. recession is still deepening, reports Thursday suggested.

"Consumer sentiment reached a six-year low as Americans continued to be rocked by increasing job losses, poor holiday-shopping season reports, and the ongoing inability of the government and the private sector to stabilize the economy," RBC said in a report based on a survey of U.S. consumer attitudes and spending.

Considering the U.S. consumer accounts for 70 per cent of that economy's GDP, and the U.S. accounts for 75 per cent of Canadian exports, that doesn't bode well for Canadians either.

Still, there was a hint of hope amid the rubble of the RBC survey's findings - a marginal increase from 29 per cent to 30 per cent of respondents who expect their local economy will be stronger in six months' time.

The analysis said this may reflect an enthusiasm for soon-to-be-inaugurated U.S. president-elect Barack Obama and "Americans' openness to the stimulus proposals coming out of Washington rather than any expectation that local economies will improve quickly."

In light of the deepening slump in the U.S. economy and consumer confidence, it's not surprising the mood of Canadian exporters has also hit an all-time low.

But it was concerns about domestic sales prospects that weighed most heavily on exporters, Export Development Canada chief economist Peter Hall said Thursday in releasing results of the fall survey on the confidence of exporters.

Just 28 per cent - the lowest share ever by a wide margin - expected a near-term increase in domestic sales, while only 12 per cent expected an improvement in the domestic economy, while a record high 57 per cent expected a further deterioration.

"Over the past five years, exporters were able to count on a strong domestic market to tide them through the relentless rise in the Canadian dollar," Hall said.

"Last fall, that upbeat view of the domestic scene soured considerably."

Underscoring their pessimism about the domestic economy was news from Statistics Canada of a further seven per cent drop in new car sales in November, the steepest monthly plunge in three years.

Meanwhile, showing the growing global concern about the economic crisis was a decision by the anti-inflation-focused European Central Bank to cut its trendsetting interest rate to two per cent.

Housing market in 2009

In Canada, the average price of homes sold via the MLS in November fell 9.8 per cent from the same month in 2007.

CANADA: -9.8%

St. John's: +30.8%
Saint John: +5.5%
Halifax-Dartmouth: +12.6%
Ottawa-Carleton: +7.3%
Toronto: -6.3%
Kitchener-Waterloo: +2.2%
Hamilton-Burlington: +6.3%
London-St. Thomas: +1.6%
Windsor: +3.4%
Winnipeg: +1.8%
Saskatoon: +10.9%
Regina: +27.6%
Edmonton: -2.0%
Calgary: -6.0%
Victoria: -12:4%
Vancouver: -11.6%

UNITED STATES: -18%

The price of single-family U.S. homes in the 20 largest metropolitan areas fell 18 per cent in October from a year earlier.

Las Vegas: -31.7%
New York: -7.5%
Cleveland: -6.2%
Portland: -10.1%
Dallas: -3.0%
Seattle: -10.2%
Miami: -29.0%
Tampa: -19.8%
Atlanta: -10.5%
Chicago: -10.8%
Boston: -6.0%
Detroit: -20.4%
Minneapolis: -16.3%
Charlotte: -4.5%
Phoenix: -32.7%
Los Angeles: -27.9%
San Diego: -26.7%
San Francisco: -31.0%
Denver: -5.2%
Washington: -18.7%

At Christmastime a year ago, Toronto-area realtors had good reason to celebrate. The year ended with record high sales and the industry never looked healthier.

"Home buyers had to stop at Chapters last year for reading material just to stand in line for a condo," says realtor Mike Donia. "The banks were lending you money hand over fist."

One year later the turnaround has been dramatic and unprecedented.

At the end of 2007 prices rose by 7 per cent and sales by 12 per cent over the previous year.

But in September, as the global credit crunch started to exact a toll, the Toronto market finally succumbed to a 3 per cent price decline, the first such drop in more than a decade. By the end of November, the average home was some $25,000 cheaper than it was during the same time last year.

"The swiftness of the change in real estate market conditions and market sentiment was quite surprising," says RBC senior economist Robert Hogue. "For most of us looking at where the GTA economy was heading it was fairly clear there would be some dampening, but over the last few months it looked as if the market just priced in all the problems at once."

Given the credit crunch on Wall Street that has spread to markets globally, the question remains as to how much further Canadian households will be affected in 2009? For the average homeowner, the worry is whether prices will fall further and, if so, by how much.

Economists missed calling the real estate decline by a wide margin, to the point that last month the Bank of Canada warned ominously that many Canadians were in danger of losing their homes if the economic crisis gets worse.

But how did we get to this point?

The mantra, repeated endlessly by the real estate industry and some analysts, was that Canada was largely isolated from the pain in the United States, and that high oil prices and a more conservative approach to lending had helped us to partially decouple from sectors of the global economy.

"We're fine – it's the rest of the world that has problems" seemed to be the key message over the past few years.

"Canadians have watched with amazement for nearly two years now at the collapse of the housing sector in the United States, the United Kingdom and other countries that experienced overvalued housing prices with the sense that markets in this country stand on more solid ground," says Hogue.

It wasn't until last year, when prices started to fall in western provinces that some economists started to question the strength of the Canadian housing market.

And while sales in Toronto fell every month last year compared with the previous year, prices seemed to be holding the line.

"We're fine – it's the western provinces that have the problems – they appreciated too far and too fast" seemed to be the consensus then.

Analysts forecast that, after a decade-long run, the Greater Toronto Area's real estate market would be in for a "soft landing," and they seemed to be right.

In January, sales were down by only 2 per cent – a rounding error compared with the record numbers of 2007.

As the year progressed, sales started to decline further, but more importantly for homeowners, prices didn't.

But since September, prices and sales started to fall. The most recent numbers from the Toronto Real Estate Board show that, in the first two weeks of December, there were 1,487 sales, or about 48 per cent less than the same time in 2007.

Most people are hoping this is just a blip on the way to greener pastures.

After all, the Canadian economy is still fundamentally sound. It's true that our export earnings, job growth and corporate balance sheets are better than other nations, and the Organization for Economic Co-operation and Development said last month that Canada will lead the G7 nations in economic recovery in 2010.

A lot, of course, depends on what happens to our neighbours to the south. A prolonged recession means that fewer Americans will be buying cars from Ontario or lumber from British Columbia.

During the last bubble, average prices of existing home in Toronto hit $280,000 in 1989 and took seven years to sink downward, hitting bottom in 1996 at $196,000 before taking off again in 1997.

No one expects this market to be as brutal, but then again, no one expected oil to be below $50 U.S. per barrel, and a Canadian dollar more than 20 per cent less than at the start of the year.

To see what's in store for this year, the Star asked some of the country's top economists what they thought 2009 would bring for the real estate market:

"The question is what kind of correction are we having?" asks Tal. "Are we seeing a U.S.-style meltdown, or simply a recessionary correction?"

Tal says that Canada never had a subprime problem in the league of the United States, which means a market correction here will be more moderate.

"What we have is the U.S. situation minus the subprime problem, which gives you Canada," says Tal. "It's not a freefall, but it will still be a recession.

"In that case it's reasonable to expect to see a notable decline in major cities."

Tal expects average prices across the country to fall another 10 to 12 per cent by the end of 2009.

"Is this a crisis? No. Is it pretty? Still no, and you will lose two years of price appreciation. But this is part of the economic cycle."

Tal predicts that there may be a slight uptick in sales in the spring but "nothing significant" as the market will continue to level off till the end of the year.

After 2009, he is forecasting that the market will "flatline" for three or possibly four years, with not much activity, similar to the 1992 to 1997 period in the Toronto market after the last real estate bubble burst.

The most immediate problem for the Toronto market is a potential oversupply of newly built condominiums, says the economist.

Condo pricing will lead the correction down, even as he expects some future supply to be cut as developers are unable to get financing for some projects. He is bullish on the condo market in the longer run of at least five to 10 years, because new immigrants and baby boomers still will be attracted to that form of housing, says Tal.

Carl Gomez
VP research, Bentall Capital

Canada's housing market is "modestly overvalued" with home prices needing to fall by as much as 25 to 30 per cent from the peak in Alberta and British Columbia, says Gomez.

Ontario prices, he figures, are about 10 per cent overvalued.

"The market is in correction phase, and the question is how far back will we continue to go?" asks Gomez.

Protracted job losses in the key Ontario market, for example, would mean further pain. And while manufacturing has been hit over the years, Toronto has been largely isolated from the problems because of its strong financial services sector, says Gomez.

"You are starting to see some problems in the services sector now. They have been a major driver of growth in Toronto, everything from banks to insurance companies to accountants and realtors. We haven't really seen this shoe drop yet, but if you see things coming off dramatically, then things will definitely get worse and prices will be pushed down further."

Like Tal, Gomez sees the most vulnerability in the Toronto condo market.

"In some pockets it's dominated by speculators. If they sense they are not getting the kind of return they want, they are the first to pull the plug," says Gomez.

Robert Hogue
Senior economist, RBC

The next few months will be significant to determine where the market is heading, says Hogue.

"But given the economic context where conditions have deteriorated quite significantly, you'd be hard pressed to see a quick recovery," he says. "For 2009 we will likely remain in a period of fairly soft sales and declining prices."

A housing affordability study prepared by Hogue shows that homes are becoming modestly more affordable in the Toronto market.

It takes 53.3 per cent of pre-tax earnings to afford a bungalow in the Toronto market. But that's still up from the long-term average of 48.3 per cent.

"That means you've got to have a decline in interest rates or prices of homes coming down to meet the long-term average."

Still, Toronto looks solid compared with some other Canadian cities, where the affordability index is 33 per cent higher than long-term averages for Vancouver and 40 per cent for Saskatoon.

House prices to rise 3.5 per cent in Canada

The strong housing market of the last few years has now cooled down as supply and demand have come more into balance, but prices will still rise this year, though not by double digit figures of the past, says CEO Phil Soper of Royal LePage Real Estate Services.

Through the rest of this year and into next, he said, Royal LePage's second-quarter statistics released Thursday suggest that average prices will creep up by about 3.5 per cent.

"When you're looking at the real estate market, it's important to look at not just house price changes, but also the changes in activity levels," he said.

"There are significantly fewer homes trading hands now than there have been in the boom years of this decade," he said. "It's a moderate market."

Royal LePage's report followed one from the Canadian Real Estate Association on Tuesday indicating that average house prices in June fell 0.4 per cent compared with a year ago for the first time since early 1999.

CREA's figures suggested that house prices were "basically flat" in June, said Soper, adding they were somewhat skewed by the fact that the association was unable to include Montreal in their results due to a reporting foul up.

He estimated Montreal is about 10 per cent of the country.

"If you look at our numbers, Montreal had a price increase year-to-date in the four per cent range," Soper said.

While prices are forecast to move higher, the country's largest real estate company predicts the number of transactions this year will fall by 11.5 per cent to 461,000 units.

Along with an easing of pent-up demand, it also attributed the slowdown to jitters among prospective buyers because of economic uncertainty following layoffs in the manufacturing and forestry sectors due to the subprime mortgage fiasco in the United States and worldwide credit crunch.

Avery Shenfeld, senior economist at CIBC World Markets, said earlier this week that there has been a noticeable softening of the housing market over the past few months.

"Some of that is coming in cities where prices had gone through the roof in the previous one or two years," he said.

In the second quarter, the average price of detached bungalows rose by 5.6 per cent from a year earlier to $351,587. Two-storey properties increased 5.2 per cent to $418,943.

"After several years characterized by a persistent shortage of listings, home buyers have felt the pressure of bidding wars and take-it-or-leave-it counter offers ease during 2008," Soper said.

"Home sellers have had to come to grips with the longer time it is taking to sell properties, but can take comfort in a market that continues to support reasonable price increases."

The survey of 17 cities across the country found lower prices in two major markets - Edmonton and Calgary.

In Edmonton, the average price for a bungalow dropped 14.5 per cent while an average Calgary two-storey dropped six per cent.

The greatest price increase was in Regina, which has seen home values surge as higher commodity prices have driven the regional economy.

In Regina, all types of housing saw higher prices, even though inventory of homes increased five-fold, the survey said.

Across the country, said Soper, some regions are slightly oversupplied right now with houses, in particular Calgary and Edmonton. Meanwhile, supply shortages are still being reported in Regina, Saskatoon, St. John's and Winnipeg.

For most of Canada, however, the number of people looking for homes is approximately equal to the number of homes available for sale.

"The housing market is a cyclical one," said Soper. "We've gone through an extended period of excess demand which has caused prices to rise at an unusually high rate."

"What we're seeing at the end of the cycle is that there are fewer numbers of new buyers in the market because they've got their homes."