December 12, 2013

Canada’s housing market – up, down or sideways?

If the most recent analyses of Canada’s housing market have a common theme it is their frequent use of the terms “stable” and “solid”.

For example, according to a recent report by Genworth Canada and the Conference Board of Canada (GC-CBC) titled an In-Depth Housing Analysis for Canada, the Provinces and Nine Metropolitan Areas, despite the repeated attempts by the federal government to dampen housing demand by tightening mortgage lending regulations, “Canadian housing markets remain generally solid.”

The GC-CBC analysis goes on to state that while there are still concerns about the health of the global economy, Canada’s economic prospects are improving with growth for 2014 projected at 2.4%, up from an estimated 1.8% in 2013.

Consistent with the stronger pattern of economic activity, the GC-CBC study projects that the rate for three-year conventional mortgages will gradually trend higher from 3.8% in 2013 to 5.1% in 2015. Moreover, this measured rate of increase in mortgage rates against a background of positive job growth should allow indebted households to adapt gradually to the resultant increase in mortgage payments.

Given the generally positive economic fundamentals, the study further projects that housing starts will increase slightly from an estimated 181,400 in 2013 to 185,000 in 2014.

In a similar vein to the GC-CBC report, CMHC’s most recent (Q4/2013) Housing Market Outlook observes that housing starts in Canada have, as the chart below illustrates, remained “stable” since March of 2013.

Further, it expects this trend to continue well into 2014 after which it anticipates that starts will moderate somewhat. Driven by a gradual improvement in employment against a background of low interest rates, the crown corporation expects that the pattern of existing home sales will strengthen somewhat in the first half of 2014 before losing momentum in the second half of the year.

On an annual basis, the agency expects sales to reach 456,700 in 2013 and increase to 468,000 in 2014.

Finally, the Royal Bank’s latest (November) Monthly Housing Market Update noted that the decline in October existing home sales was not really a surprise given the summer surge that was driven by buyers attempting to lock-in lower interest rates.

The Royal Bank further indicated that the decline in October sales should ease concerns that the housing market was rebounding too rapidly and that it expects home sales to stabilize near current levels. However, the Bank indicated that there is a possibility that sales might ease further following a relatively strong summer.

As noted in the previous Economic Snapshot, with the forward-looking indicators of job growth flashing green, consumer confidence close to a three-and-a-half year high and mortgage interest rates holding near their record low, the fundamental drivers of housing demand remain very solid.

Although, as noted above, while there is a risk that housing demand might moderate briefly in the near term, the strong fundamentals suggest that this pull-back will be brief and that demand will strengthen early in 2014 and remain firm into the second half of the year.

John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.

Canada: existing home sales and housing starts (SAAR)

Data Source: CMHC, CREA/Chart: CanaData – Reed Construction Data.

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