Canada's Housing Bubble

CREA released their final sales data for November.  Needless to say, the market is showing some surprising strength, though some unanswered questions remain.

Sales did register 9% below 2009 levels, but they were certainly not alarmingly low.  However, with the exception of the panic-induced abysmal sales levels of 2008, they did come in at the lowest numbers in at least 5 years.

In addition, given that the sales numbers from October and November have been substantially lower than the Q4 results from the past 5 years (again with the exception of 2008), it would take a shocking rebound in December sales to pull the Q4 average anywhere near the typical Q4 result of the past half decade.

More tellingly however is the trend in sales and inventory which continue to show a pronounced sellers strike.  It seems that the sellers have clearly gained the upper hand as new listings and months of inventory continue to decline while the sales-to-new listings ratio has bounced back nicely.

While demand is clearly rebounding, it remains weak by recent historical standards.  The question of where the interested sellers went is certainly worth asking.  The notion that sellers are inclined to pull their homes from the market when sales and price conditions deteriorate is clearly validated, but if demand stays below average or even weakens as I expect it will, price pressure will eventually result.

CREA acknowledges this, noting that, “An increase in new listings is likely to return many sellers markets to balanced territory over the coming months…sellers who previously shied away from putting their home on the market are expected to list their home in response to improved housing demand in recent months.”

The question now is whether the demand will rebound as sharply as the inevitable increase in listings.

Home prices were up 2% year-over-year.

The press release ended with this quote by Greg Klup, CREA’s chief pumper economist.  It’s clearly intended as a statement to those in Ottawa currently debating amortization rule changes:

“Changes to mortgage regulations earlier this year were prudent and sufficient, striking the right balance between preventing speculative housing market activity and keeping homeownership affordability within reach for creditworthy home buyers.”

Translation:  Please, please, please don’t kill the 5/35 mortgage.

“That’s a good thing, since housing activity helped support Canadian economic growth this year.”

Correction:  It WAS the economic growth this year.

“Rising interest rates and weaker expected job growth are likely to contribute to softer prospects for housing market activity and average price growth next year, reflecting weakening economic growth prospects.”

Agreed.  At least in principle, if not in scale.

Bottom line here is that the residential market continues to show surprising strength, giving yet another round to the bull crowd.  The bears will have to take it on the chin for a little longer.  They can take some comfort in the fact that fatigue in demand is showing while questions about the dwindling inventory remain unanswered.

Cheers

Ben