Commercial Real Estate News Blog

Canadians will find it more expensive to own a home this year and in 2011, as higher interest rates are expected to chip away at affordability even as the rise in home prices begins to subside, two of Canada's major banks predicted Tuesday. A report by RBC Economics Research released Tuesday said affordability would deteriorate throughout 2010 and 2011 as rising interest rates increase mortgage and other loan payments.

"Some erosion in affordability is going to come from higher interest rates... (meanwhile) prices continue to rise. Combine the two and I think the second quarter you should expect some further deterioration in affordability," said RBC senior economist Robert Hogue.

Canada's hot housing market is coming back into balance between supply and demand following a seller-friendly period in which buyers competed for — and drove up the prices of — the few houses for sale during the first stages of economic recovery.

As demand cools and supplies increase, the pace of price increases will slow, but won't fall fast enough to offset rising interest and mortgage rates, Hogue said.

"I'd be hard-pressed to see any kind of the recent pace in price increases being maintained, but it might not be an outright decline any time very soon," he added.

The RBC report found home ownership costs in Canada rose across all housing segments in the first three months of 2010 — the third quarter of increases in a row.

With the exception of Alberta, home affordability measures deteriorated across all provinces with significant declines in affordability in British Columbia, Saskatchewan and Manitoba. Housing affordability declined more moderately in Quebec, Ontario and Atlantic Canada.

Meanwhile, a new report from the Canadian Real Estate Association found that Canadian home prices are unlikely to undergo the type of sharp correction seen south of the border, where prices plummeted and foreclosures ensued.

The CREA report says the current period of high home prices is a natural part of the demand-driven market cycle.

"The Canadian housing market is now widely thought to be at, or very near, the top of a cycle, and the ratio of home prices to incomes is currently high," said its chief economist Gregory Klump.

The CREA report said the income-to-house price ratio will soon revert to its long-term average as it always does as part of a normal housing market cycle.

"History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again," Klump said.

Unlike their U.S. counterparts, Canadian mortgage holders have borrowed conservatively and are accelerating mortgage repayment, which will give options to those who may face financial difficulties when they renew their mortgage at a higher rate, the report said.

A report on housing affordability by CIBC World Markets on Tuesday suggested about 1.5 million, or 17 per cent, of houses in Canada, are currently overvalued.

CIBC senior economist Benjamin estimated that, on average, Canadian home prices are now around 14 per cent over their "fair" value, adding there would likely be a five to ten per cent price correction in the next few years.

"This pace of appreciation has been quicker than justified by housing market fundamentals such as income, rent or demographic changes," Tal wrote in the report.

"While the booming housing market is starting to come back to earth, the fact that prices are overvalued today does not necessarily mean that they will crash tomorrow," he added.

Tal's report found the average price of a house has risen by nearly 23 per cent since reaching recent cyclical lows in January 2009. And the erosion of affordability — as interest rates rise faster than prices drop — could cause problems for the most vulnerable segment of the population, he said.

CIBC's new home ownership affordability index found that home ownership is increasingly difficult for families with household incomes less than $50,000, who on average spend close to 60 per cent of their gross income on mortgage payments, property taxes and electricity costs.

The report found that Canadians today spend 15.6 per cent of their average gross personal income on mortgage payments, which is about the same as 10 years ago. When adding in electricity bills and property taxes, it rises to about 22 per cent of gross income.

Tal predicted that in the second quarter of the year, affordability will continue to deteriorate, even as prices level off. He added that home prices will fall in the second half of the year and in to 2011, which will improve affordability.

"I don't think affordability will be a major issue over the next two years. I think it will be relatively stable with interest rates rising, but prices actually going down a little bit," he said.

Residential sales slipped 2.6 percent from March.

Canadian home resales slowed in April from the previous month while new listings climbed, suggesting the country's real estate market could soon start to cool after a year of surging prices. Even so, sales of existing homes still showed a big jump from the same month last year, according data on Monday from the Canadian Real Estate Association, with prices rising at a double-digit pace year over year.

Residential housing has become an important driver of the Canadian economy, even during the recession, spurred partly by low interest rates. It also gave rise to a fiery debate on whether the housing sector was forming a bubble, a charge that policymakers swiftly downplay.

All told, 42,078 homes changed hands in April, up 20.1 percent from the same month last year. But sales slipped 2.6 percent from March, the third decline in four months, and have fallen 6.8 percent from the peak reached in December.

The cooler pace of activity is in line with a long-held view by many economists, who see the market slowing after the spring as more homes are put up for sale and interest rates begin to rise.

Some homeowners may also move sooner in order to avoid extra costs associated with new, harmonized sales tax (HST) regimes, set to begin July 1 in Ontario and British Columbia, and this could add to a front-loaded year of sales and pricing activity.

"Prices may see one last uptick in the next few months, but are expected to simmer down notably in the second half," said Doug Porter, deputy chief economist at BMO Capital Markets.

"Indeed, outright price declines are certainly a very real possibility in Ontario and B.C. amid much more moderate activity after the HST kicks in."

CREA said a slowing market in British Columbia was responsible for more than half the decline for the year. Ontario and Quebec, two of the country's larger markets, remained close to record levels in April.

The number of new listings rose to 99,901, surpassing the previous April record, set in 2008, by 0.6 percent. The average national price rose 12.2 percent to C$344,968 ($331,700). The rising supply of homes for sale could dampen prices in the months ahead. Sales may also cool as higher mortgage rates and rising prices chip away at demand, and overall housing investment falls into line with the broader economic recovery.

"The pace of moderation is expected to be measured and orderly," said Millan Mulraine, a senior strategist at TD Securities.

Source: Canadian Real Estate Association

The pace of Canadian home sales slowed in February, as a hot Toronto market wasn't enough to balance a sharp Olympic-related decline in activity in British Columbia.

The Canadian Real Estate Association said the seasonally adjusted national home sales totalled 42,799 units in February, 1.5 per cent lower than January. “Activity decline mostly in Vancouver, but this was partially offset by an equally large gain in Toronto,” the association said in a release. “Sales were also down in a number of other B.C. markets. Since there were no significant gains in sales activity elsewhere in Canada, the national figure was pulled slightly lower.”

Association president Dale Ripplinger said the Winter Games in Vancouver likely affected sales in February. He said March sales will be an important indicator of how the market will fare in the coming months, especially considering the Harmonized Sales Tax which will make real estate transactions more expensive comes into effect in Ontario and B.C. this spring.

“Activity is expected to remain elevated in Ontario and B.C. over the first half of the year,” he said. “Buyers are looking to beat the introduction of the HST and expected interest rate hikes.”

The Bank of Canada is also expected to begin bumping interest rates higher in the second half of the year, which would also make mortgages more expensive.

“Activity is expected to remain elevated in Ontario and B.C. over the first half of the year,” he said. “Buyers are looking to beat the introduction of the HST and expected interest rate hikes.”

Actual sales across the country, not seasonally adjusted, were 36,275, an increase of 44 per cent from the same month last year. New monthly records were set in Quebec and Ontario.

The average price of all homes sold on the Multiple Listings Service was $335,655, up 18.2 per cent from a year ago. The national weighted average price, which compensates for provincial differences, showed a 15.6 per cent increase year-over-year in February.

The large gains should begin to pull back, because the numbers are flattered by easy comparisons to 2008, when the housing market was mired in the recession.

“Since a year will soon have elapsed following the recessionary decline and subsequent rebound for the Canadian resale market, year-over-year comparisons are expected to continue shrinking,” CREA said.

Source: The Canadian Real Estate Association

According to statistics released by The Canadian Real Estate Association, the number of homes sold through the Multiple Listing Service(R) (MLS(R)) Systems of Canadian real estate Boards declined in January 2010 from the previous month. Seasonally adjusted national home sales dropped 2.8 per cent from near record levels reported in December. Ontario accounted for about half the national decline. Activity was also down in British Columbia, Alberta, and Manitoba, but reached new heights in Quebec.

Actual (not seasonally adjusted) residential sales activity in January 2010 was up 58 per cent from year ago levels, when national home sales activity reached the lowest level in a decade. Because activity began recovering in February last year, large year-over-year gains are expected to shrink over upcoming months.

The average price of all homes sold through the MLS(R) Systems of Canadian real estate Boards in January 2010 was $328,537, up 19.6 per cent from one year ago. In January 2009, the average residential sale price fell to the lowest level in almost three years. Year-over-year average price gains are being stretched by weakness one year ago, and are expected to shrink beginning next month.

The price trend is similar but less dramatic for the national weighted average price, which compensates for changes in provincial sales activity by taking into account provincial proportions of privately owned housing stock. It climbed 14.9 per cent year-over-year basis in January 2010.

The residential average price in Canada's major markets also climbed 19.6 per cent year-over-year in January. As with the national counterpart, the price trend is similar but less dramatic for the major market weighted average price, which rose 13.1 from January 2009.

Across Canada, the seasonally adjusted number of new listings on Boards' MLS(R) Systems edged up three tenths of one percent on a month-over-month basis in January to reach the highest level since November 2008. New listings rose in British Columbia, Alberta and Newfoundland, offsetting declines in other provinces. The actual (not seasonally adjusted) number of new residential listings was up 3.4 per cent from one year ago.

"The resale housing market is becoming more balanced in a number of provinces, including my own province of Saskatchewan," said CREA President Dale Ripplinger. "A more balanced market is likely to result in smaller price increases going forward, with buyers in less of a rush due to an increase in supply. That said, market conditions vary across Canada, so buyers and sellers are wise to consult with a REALTOR(R) since they know current conditions in your local market."

Strong demand for resale homes continues to draw down supply. There were 170,199 homes listed for sale on Boards' MLS(R) Systems in Canada at the end of January 2010, a decline of 18 per cent from levels reported for the same month in 2009. Nationally, there were 4.4 months of inventory in January 2010 on a seasonally adjusted basis. This is up slightly from 4.2 months in December.

The actual (not seasonally adjusted) number of months of inventory in January 2010 stood at 6.6 months. This is well below where it stood one year ago (12.8 months), but slightly higher than it was in the month of January in the years 2004 through 2008. The number of months of inventory is the number of months it would take to sell current inventories at the current rate of sales activity.

"January results suggest that the national resale housing market may be past the recent peak," said CREA Chief Economist Gregory Klump. "One car doesn't make a parade, so a few more months of results showing a cooling trend will be required before talk of a Canadian housing bubble begins to fade. It could take until the second half of the year before a cooling trend becomes evident, since home buying activity may continue to be accelerated in the first half of 2010 by expected interest rate increases, and by the introduction of the HST in Ontario and British Columbia on Canada Day."

CREA cautions that average price information can be useful in establishing trends over time, but does not indicate actual prices in centres comprised of widely divergent neighborhoods or account for price differential between geographic areas. Statistical information contained in this report includes all housing types.

but it's not a bubble economists say

Canada's housing market is on the rebound after a decline in 2009 with resales expected to set a new annual record this year and home building is off to a strong start, according to two reports Monday. There in't a bubble because of a lack of speculation in the real estate market, said Scotiabank senior economist Adrienne Warren.

Prices are being driven by more buyers than sellers, not unexpected with a tight supply, and buyers may be overpaying a little in some markets, she said. "We don't think there's a bubble," she said from Toronto.

The Canadian Real Estate Association is forecasting resales for homes will set a record in 2010, largely driven by activity in the first six months of this year.

The resale housing market is expected to reach 527,300 units this year, up 13.3 per cent from 2009. This would be a new annual record, up 1.2 per cent above the previous peak in 2007, CREA said Monday.

"You are not hearing about a lot of speculative buying," Greg Klump, the national real estate organization's chief economist, said from Ottawa. "Nor is there a lot of speculative building."

Low interest rates and buyers wishing to avoid the harmonized sales tax before it comes into effect in Ontario and British Columbia will help fuel resales in the first half of this year, he said. In the second half of 2010, sales are expected to be lower as interest rates are expected to increase marginally, Klump said.

New housing starts have also gone up, according to figures Monday by Canada Mortgage and Housing Corp. The seasonally adjusted annual rate of housing starts reached 186,300 in January, up 5.8 per cent from 176,100 in December. CMHC reported actual housing starts for 2009 totalled 149,081 units, with activity improving as the year progressed.

TD Bank economist Pascal Gauthier said there's talk of a bubble because of how strong housing markets have rebounded after the economic downturn. "Our expectation is that it will not be sustained. The market will cool off. You could only really have a bubble if that was to continue," Gauthier said. Gauthier said he expects housing starts to cool off by mid-year.

The CMHC said urban starts increased 4.4 per cent to 165,200 in January. Urban multiple starts rose 5.7 per cent to 76,300, while single urban starts increased 3.3 per cent to 88,900.

The improving market comes as the federal Competition Bureau said Monday it's challenging rules imposed by the Canadian Real Estate Association, a body that represents nearly 100,000 real-estate brokers, agents and salespeople.

The federal agency says the CREA rules limit choices for consumers and force them to pay for services they don't want, also stifling innovation in the market for residential real estate services.

Sales of existing homes reached a record high for the month of December, according the Canadian Real Estate Association, with annual sales coming in above 2008 levels. “Sales activity in 2009 came in like a lamb and went out like a lion,” CREA president Dale Ripplinger said today.

“The continuation of unusually low interest rates may keep national sales activity near current levels over the coming months, as will a blip in housing demand in Ontario and British Columbia from homebuyers motivated to beat the introduction of the HST (harmonized sales tax).”

There were 27,744 units sold in December, up 72% from a year earlier “when activity dropped to the lowest level in a decade,” CREA said.

Record highs for the month were reported in Ontario, Quebec, Saskatchewan, New Brunswick, and Newfoundland and Labrador, the industry group said.

There were 465,251 homes sold last year, up 7.7% from 2008 to the fourth highest annual level on record.

On an annual basis, sales were still down 10.7% in 2009 from the peak reached in 2007.

Consumer confidence ends on a stronger footing.

National consumer confidence ended the year 2009 on a stronger footing compared to pre-recession levels, despite having edged down slightly the fourth quarter compared to the third quarter. According to the Conference Board of Canada’s index of consumer confidence, confidence eased slightly in the fourth quarter for the first time in three quarterly periods. The decrease in confidence reflects weakening sentiment about making major purchases.

The balance of sentiment about making major purchases, such as a home or a car, dipped slightly into negative territory in the fourth quarter. It had turned positive in the third quarter for the first time since the first quarter of 2008.

A negative balance of sentiment means more survey respondents said it was a bad time to buy a big-ticket item, such as a home or car, than said it was a good time to do so. This indicator is an important factor underlying the housing market.

The balance of sentiment about job growth prospects continued improving in the fourth quarter of 2008, staying positive for the second consecutive quarter. More survey respondents expect employment to pick up over the next six months, and fewer expect more layoffs.

The balance of sentiment about households’ budgetary outlook softened marginally in the fourth quarter, but remains upbeat. A positive balance of opinion means more households said they expect their household budget to improve in the next six months than said they think it will worsen.

British Columbia

Consumer confidence in British Columbia eased slightly in the fourth quarter of 2009, according to the Conference Board of Canada’s index of consumer confidence. Moderating confidence in the fourth quarter reflects softening sentiment about households’ budgetary outlooks, job prospects, and major purchases.

The balance of sentiment about making a major purchase, such as a home or a car, fell sharply and again turned negative in the fourth quarter. It had turned positive in the third quarter for the first time in two years.

A negative balance of opinion means more survey respondents said that it was a bad time to buy a big-ticket item, such as a home or car, than said it was a good time to do so. This indicator is an important factor underlying the housing market.

Sentiment about job growth prospects deteriorated in the fourth quarter. Although the balance of sentiment about near term job growth remained negative for the seventh consecutive quarter, it remained significantly less negative compared to where it stood at the height of the economic recession.

The balance of sentiment about households’ budgetary outlook stayed upbeat for the third consecutive quarter.

Prairie region

Consumer sentiment in the Prairie region improved for the third consecutive quarter in the fourth quarter of 2009, returning to the pre-recession level recorded in the second quarter of 2008.

Sentiment about making major purchases, such as a home or a car, improved for the fourth consecutive quarter. The balance of sentiment about making major purchases has stayed positive for two consecutive quarters, returning to levels on par with the third quarter of 2007.

A positive balance of sentiment means more survey respondents said it was a good time to buy a big-ticket item, such as a home or car, than said it was a bad time to do so. This indicator is an important factor underlying the housing market.

Sentiment about job growth prospects continued improving, building on significant increases recorded in the previous two quarters. The balance of opinion about job growth has stayed positive for three consecutive quarters, and is also back on par with pre-recession levels.

The balance of sentiment about the outlook for household budgets edged down only marginally in the fourth quarter on 2009 compared to the previous quarter.

Ontario

Consumer confidence in Ontario dipped slightly in the fourth quarter of 2009 after having risen in each of the three previous quarters, according to the Conference Board of Canada’s index of consumer confidence. The slight decline in confidence reflects weakened sentiment about households’ budgetary outlooks and about making major purchases.

The balance of sentiment about making major purchases, such as a home or a car, turned negative in the fourth quarter. In the third quarter, it had turned positive for the first time since the fourth quarter of 2007.

A negative balance of opinion means more households said it was a bad time to buy a big-ticket item, such as a home or car, than said it was a good time to do so. This is an important factor underlying the housing market.

The balance of sentiment about job growth prospects improved compared to the previous quarter, turning positive for the first time since the second quarter of 2006.

The balance of sentiment about the outlook for household budgets stayed positive for the third consecutive quarter in the fourth quarter of 2009, despite having softened slightly.

Quebec

Consumer confidence in Quebec eased in the fourth quarter of 2009 but remains well above levels recorded at the height of the economic recession, according to the Conference Board of Canada’s index of consumer confidence. The decrease in confidence reflects weaker sentiment about household budgets and about making major purchases.

Despite having softened compared to the previous quarter, the balance of sentiment about making major purchases, such as a home or a car, remained positive in the fourth quarter. This represents the third consecutive quarter in which the balance of sentiment about making major purchases stayed positive.

A positive balance of opinion means more households said it was a good time to buy a big-ticket item, such as a home or car, than said it was a bad time to do so. This indicator is an important factor underlying the housing market.

The balance of sentiment about job growth prospects turned positive for the first time since the beginning of 2008.

The balance of sentiment about the outlook for household budgets for the next six months eased in the fourth quarter, but nevertheless remained positive.

Atlantic region

Consumer sentiment improved significantly in the fourth quarter of 2009, continuing its rise above pre-recession levels according to the Conference Board of Canada’s index of consumer confidence for the region. This marked the fourth consecutive increase in confidence.

Sentiment about making major purchases, such as a home or a car, held steady. The balance of sentiment about big-ticket purchases remained positive for the second consecutive quarter.

A positive balance of sentiment means more survey respondents said it was a good time to buy a big-ticket item, such as a home or car, than said it was a bad time to do so. This indicator is an important factor underlying the housing market.

After improving for a fourth consecutive quarter, the balance of sentiment about job growth became positive in the fourth quarter of 2009. This is its first positive reading since the second quarter of 2008.

The balance of sentiment about the outlook for household budgets over the next six months also improved in the fourth quarter. This marks the fourth consecutive quarter in which the balance of sentiment about the outlook for household budgets stayed upbeat.

Source: The Canadian Real Estate Association