Canada’s housing market still improving

by Scott Grace on October 2, 2013

Canadian housing activity remains quite buoyant, supported by low borrowing costs and reasonably healthy employment conditions.

Home resales, after declining through the latter half of 2012, recovered over the spring and summer. Year-to-date, national sales are trending slightly below last year’s levels and are in line with the average pace of the past decade.

Home prices also are resilient. The MLS Home Price Index (HPI), which takes into account changes in the mix of sales, shows national prices tracking around three per cent year-over-year. This moderate rate of house price appreciation is consistent with balanced market conditions and long-term house price inflation.

Regionally, Alberta continues to show the strongest overall conditions, as strong population inflows and full-time job growth fuel growing housing demand. Activity in British Columbia remains on the softer side despite some recovery in sales and pricing in recent months. In most other provinces, sales volumes are fairly “typical”.

Buyers are taking advantage of still attractive borrowing costs, notwithstanding the recent upward drift in fixed mortgage rates.

Indeed, the prospect of rate increases may have drawn in potential homeowners from the sidelines. Demand also is supported by immigration and population growth, and mirrors strengthening consumer confidence.

Underlying fundamentals are less conducive to a further ramping up in housing activity. Pent-up demand from last year’s slowdown has been satisfied with sales now back in line with historical averages. Moderating job growth — employment gains have averaged 13,000 per month this year, half the average gain in 2012 — also should temper demand.

Housing affordability at a national level is still within historical norms, with high home prices offset by ultra-low borrowing costs.

However, affordability is expected to become a bigger challenge for buyers over the coming year with interest rates now drifting up.

Moreover, national affordability measures mask more strained conditions in several major centres, primarily for single-family homes in Toronto and Vancouver.

Homeowners have a number of options in the face of rising borrowing costs.

Variable rate mortgages are expected to remain near historic lows in 2014, and move up only slowly thereafter as the Bank of Canada gradually normalizes monetary policy. Many homebuyers are insulating themselves to a higher rate environment by locking in at historically low rates.

The combination of moderately higher interest rates and slowing job growth will likely dampen home sales later this year and into 2014.

Meanwhile, increased supply should limit price gains.

However, the risk of a large price correction nationally remains low barring a major adverse shock such as a sharp rise in unemployment. Sellers have been responsive to shifts in supply conditions, mortgage quality is solid, and arrears rates are low and edging lower.

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