Although the housing market is still quite warm, it’s starting to cool

Posted on 12. Aug, 2010 by in News

JOHN CLINKARD, consulting economist, CanaData

Housing demand in Canada’s six major cities was still quite strong midway through the second quarter, based on the most recent (May) Teranet/National Bank House Price Index.

The index increased by 1.3% month over month in May, its largest one-month increase since September 2009.

Over the past 12 months, the house price index has increased by 13.6% year over year due in large part to strong year-over-year gains in Vancouver (+17.1%) and Toronto (+16% ).

The surge in existing home sales in these two metro areas appears to have been caused in part by purchasers attempting to avoid paying the harmonized sales tax, which took effect on July 1 in Ontario and British Columbia.

Although the fundamental drivers of housing demand – low mortgage rates, employment growth and consumer confidence – are still quite positive, there are clear signs that demand is starting to cool.

According to the Canadian Real Estate Association (CREA), over the past several months existing home sales have declined relative to listings. This has caused the sales-to-listing ratio to fall to its lowest level since March 2009.

Moreover, based on the fact that sales in four of the most active provincial markets were weaker than expected during the peak spring sales season, CREA has scaled its 2010 forecast of existing home sales from 527,000 (+13.3% year over year) to 459,000 (-1.2% year over year).

In 2011, CREA expects sales to slow further to 426,000 (-7.3%), well down from its previous projection of 490,000 (-7.1% year over year).

Given this softening in overall housing demand, CREA now projects that in 2010 average house prices in Canada will increase by 3.5%, compared to its previous projection of 5.4%.

CREA has also revised its price forecast for 2011 lower and now expects average house prices will decline by 1.5% year over year, greater than the -0.9% decline it projected earlier in 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.

Data sources: Teranet and National Bank of Canada, Canadian Real Estate Association (CREA).

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