Canada's Housing Bubble

Aug 10, 2010 Michael Babad Globe and Mail

Canada's housing slowdown 'most dramatic'

The recent slowdown in Canada's real estate market is the "most dramatic" of a general global softening, Bank of Nova Scotia said today. While Canada and Australia led a post-recession surge as world housing markets entered 2010, activity seems to have cooled again amid softer demand and prices that came with moderating economic growth, financial market turmoil and a sluggish rebound in labour markets, economist Adrienne Warren said in a new report.

"The slowdown has been most dramatic in Canada," she said. "Average home prices in [the second quarter] were up just 6.8 per cent [year over year], compared with 16.6 per cent y/y in [the first quarter]. Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand. Meanwhile, increased listings are tilting overall market conditions back in favour of buyers. We expect demand to remain at a lower ebb into next year, and prices on average to be roughly flat."

Housing starts

Ms. Warren's report came as new numbers showed housing construction in Canada dipped in July by 1.6 per cent, largely because of a slowdown in single family homes. The annual rate of housing starts fell to 189,200 units from a revised pace of 192,300 a month earlier, Canada Mortgage and Housing Corp. said today. “Housing starts moved lower in July, largely due to a decrease in urban single starts and a reduction in rural starts,” said CMHC chief economist Bob Dugan. “Multiple starts partially offset this moderation.”

"After rebounding sharply earlier this year, the downward trend in homebuilding activity seen over the past three months should not come as a shock," said Toronto-Dominion Bank economist Dina Cover. "Starts running ahead of the household formation rate (estimated at 175,000-180,000 units) can only be temporarily sustained when prices are rising rapidly. This is no longer the case.

"Indeed, the moderation in starts is consistent with a cooling in the overall housing market. Existing home sales have been trending down since the start of this year – with the decline accelerating in May-July – while prices have been losing modest ground since May. In turn, lower home prices have dampened the incentive for homebuilding. With prices expected to slide a bit further, fewer home starts are likely to hit ground."