Canada's Housing Bubble

Existing home sales in Canada rebounded in August, but the industry consensus is both prices and activity will decline the rest of this year. The only argument is by how much.

The Canadian Real Estate Association reported yesterday that August sales were up 4.1% on a seasonally adjusted basis from July -- a bad month for home sales because of the effects of the harmonized sales tax implementation in Ontario and British Columbia. As consumers scrambled to make their home purchases ahead of the July 1 HST deadline, June figures saw a boost, but July sales withered.

The real concern now is how the market will stack up over the rest of this year and into 2011, especially when compared with a buoyant 2009 housing market that set records for prices in many major markets.

TD Bank Financial Group economist Francis Fong weighed in yesterday with a forecast that sales will drop by 20% and prices by 7% on a national basis in 2011.

"The trend decline in both home sales and prices that has occurred across most of 2010 is largely a cooling of the excessive surge in housing activity that occurred across 2009. Between January and December of last year, home sales had skyrocketed by 66% and prices by almost 22%, which eroded affordability considerably and were simply unsustainable."

CREA chief economist Gregory Klump says the rest of the year will be "soft" compared with 2009. "We will be looking at year-over-year declines and there may be a decline in average price too," he said. But he added: "I don't see the continuation of a dizzying descent in sales activity."

Price increases across the country are now practically non-existent. The average price of a home sold last month was $324,928, up marginally from $324,843 a year ago. However, when compared with July, when the average price of a home sold was $330,351, prices are down 1.6%.

For the first eight months of the year, sales remain 2.2% ahead of last year's pace. Supply is rising in the market with new listings up 1.9% from a year ago, but still 16% below the peak reached in April.

Yet overall inventory has shrunk slightly. The number of months of inventory, which represents the number of months it would take to sell current inventories at the current rate of sales activity, was 6.9 months in August compared with 7.3 months in July.

CREA also warned that while prices are stable, consumers can expect to see shrinking margins on home sales in Canada's most active and expensive markets. "Rising interest rates and a projected slowdown in job growth mean that the Canadian housing market is expected to continue to cool," said Georges Pahud, president of CREA.

Don Lawby, chief executive of Century 21 Canada, also sees a slowdown. "We'll see more stability in B.C. and Ontario. I don't think it's going to be a great fall market. But to what degree [it falls], I don't know yet. It sure isn't going to compare with last fall. It's going to be down."

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