Canada’s housing market: The one that no one can predict

Canada’s housing market+The one that no one can predict
Canada’s housing market: The one that no one can predict

Another month of housing data is guaranteed to produce one thing: more arguments about where the market is going.

Statistics from the Ottawa-based Canadian Real Estate Association show actual July sales were up 9.4% from a year ago while average sale price nationwide rose 8.4% to $382,373 during the same period.

Given the housing market seemed to be sliding just a few months ago, the question is where is it headed next? At stake is further federal government intervention, something Ottawa seemed to do this month as Canada Mortgage and Housing Corp. tightened some mortgage lending rules.

On one side of the divide you’ve got the real estate community with people like Phil Soper, chief executive of Royal LePage Real Estate Services, saying improved results for sales and prices in July are not all that dramatic by historical standards.

Their opponents are the housing naysayers like David Madani of Capital Economics who has been calling for a housing pullback since February 2011 and portrays the recent bump in sales as a last gasp before the market cools for the rest of 2013.

Mr. Soper said people have been predicting the market was going to fall going back to 2008. “It is as believable as the prediction from Capital Economics that home prices are going to fall by 25%. They just keep rolling out the same forecast year after year,” he said. “They try desperately to come up with a new reason [for the market to fail] — and now it’s because interest rates are going up.”

The real estate executive says July sales statistics from a historical standard were “tepid” and adds the numbers gets “the big headline” because the comparison is to a period when housing sales were slumping badly.

As for the idea that consumers rushed into the market to beat rising mortgage rates, Mr. Soper says consumers have been hearing that rates are going up for too long and are now immune to the chatter. A five-year fixed rate closed mortgage had dipped as low as 2.99% this year but that same product is around 3.59% today.

For his part, Mr. Madani says even a minor move in mortgage rates can have dramatic impact on the market because marginal home buyers are sensitive to even moderate changes in monthly payments. He adds new home sales have been slumping because consumers want to get into their property right away so they can secure immediate financing and not wait up to a year for a low rise home to be completed.

“[The market] has only pulled forward sales that would have happened later in the year,” said Mr. Madani.

He adds people who claim his call on the market is wrong will have to be patient. “Yeah, we’ve pushed the timeline out a bit,” said Mr. Madani, acknowledging his original call was made about 30 months ago. “We are dealing with something involving irrational exuberance, beyond the scope of any economic forecasting model.”

We are dealing with something involving irrational exuberance

While other economists are not as bearish, they do see a moderating market. Sonya Gulati, senior economist at Toronto-Dominion Bank, says higher rates will limit sales increases but she still sees gains for 2014.

“Price growth ought to see some weakness in 2014, as the supply of new and resale homes creep up,” she said. She notes the industry’s aggregate MLS home price measure, which is less distorted by the composition of sales for a given month, shows July prices were up only 2.7% year over year.

Robert Hogue, senior economist at Royal Bank of Canada, struck a similar tone. “Fairly brisk July resale activity — matching the 10-year average — effectively confirmed that the recent months’ strengthening trend was no fluke and that last year’s slowing was not the prelude to a major correction,” said Mr. Hogue, who nevertheless sees a small decline in sales for 2014.

Meanwhile, CREA says the latest data just shows the market is leveling off a bit and sales activity is really just average at this point.

“Canadian home sales have staged a bit of a recovery in recent months after having declined in the wake of tightened mortgage rules and lending guidelines last year,” said Gregory Klump, chief economist with CREA, who expects August results will also look strong as they are compared to a weak 2012.

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