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."

Canada's housing market

The real estate market appears poised for a soft landing rather than a crash, in a cooling trend the Bank of Canada says is both “expected and welcome.”

Sheryl Kennedy, the central bank's deputy governor, said Canada's financial prudence has helped it sidestep the sharp home price declines being experienced in countries including the U.S., Britain and Spain.

“The Canadian housing market does not appear to be characterized by excess supply at this time,” she said in the text of a speech delivered yesterday in Banff, Alta. “The proportion of unoccupied, newly built dwellings in most cities remains below historical averages, suggesting that a major widespread reversal in house prices is unlikely in the near term.”

In the past decade, prices of existing homes in Canada have risen by about 55 per cent, while new-home prices have risen by about 27 per cent. As one of the country's largest housing booms loses steam, most economists are forecasting a small increase in prices this year that will keep pace with the central bank's 2-per-cent target for inflation.

It's a much different story in the U.S. market, where home prices dropped by 14.1 per cent year over year in the first quarter of 2008, according Standard & Poor's/Case Shiller national home price index.

That record price decline occurred at a pace five times faster than that of the last U.S. housing recession, according to the index's quarterly report, released last month.

Much of Canada's housing boom was the result of supply catching up with pent-up demand that followed the downturn of the late 1980s and early 1990s, according to Ms. Kennedy.

Canada's conservative mortgage culture has helped protect it from the excesses seen during the U.S. boom, which had a much larger amount of subprime mortgages, she added.

As the housing market cools, the Bank of Canada can worry less about the sector as a driver of inflation, said Michael Gregory, senior economist at BMO Nesbitt Burns Inc.

“This speech would have been a lot different if we still had double-digit price gains on new and existing homes,” he said in an interview.

The central bank now has a more pressing concern on its hands in soaring commodity prices, he said. In the real estate market, the issue has shifted to how much cooling prices could put a damper on consumer confidence, he added.

Despite her fairly positive outlook, Ms. Kennedy cautioned that Canada can't afford to become complacent about the real estate market, noting it took a decade for prices and sales to rebound after the bust of the late 1980s.

To that end, the central bank is keeping an eye on “challenges,” including ensuring that mortgage innovations, including 40-year amortization products and “near-prime” mortgages, don't detract from prudent lending practices.

Ms. Kennedy's comments suggest the “the jury is still out” at the Bank of Canada regarding the value of these innovations compared with their potential risks, Mr. Gregory said.