Hadekel: No bubble yet in housing market
By Peter hadekel, SPECIAL TO THE GAZETTE
MONTREAL — Years of cheap mortgage rates have helped to stoke demand from a new generation of homebuyers in Canada and fears are still being expressed about whether the housing market might overheat.
The current level of sales is the best in more than four years and closing in on highs reached in 2007 before the last recession.
But it turns out that the hot market is really limited to three cities — Calgary, Toronto and Vancouver. Elsewhere, including Montreal, the market remains relatively well balanced, according to August statistics from the Canadian Real Estate Association.
In Montreal, sales are down 3.7 per cent so far this year, while prices have edged up by 1.4 per cent.
That’s in stark contrast to Canada’s hot spots. Average transaction prices in August on the MLS network jumped 9.8 per cent in Calgary and 7.8 per cent in Toronto versus a year ago. Vancouver was up handily, with a 5 per cent increase.
Prices in those markets are rising faster than family income, further straining affordability, noted Doug Porter, chief economist at BMO Capital Markets.
The continued price gains in the three cities will increase their vulnerability to a shock — whether it comes from the economy, interest rates or something else, he said.
The Bank of Canada has said it no longer assumes there will be a soft landing in the housing market, indicating that the sector has been stronger than expected.
Its concerns may be real but the fact remains that many local markets are flat and even weakening. Indeed, there’s a deepening divide between the biggest cities and smaller markets.
On the sales side, almost half of urban markets reported declines in August, Porter noted. There were double-digit drops in places like Halifax, Sudbury and Winnipeg.
It’s a similarly mixed story on the price side, with a median price increase of 2.2 per cent across the country.
The housing market was hurt by the long winter and unseasonably harsh spring weather across Canada as the normal spring activity was deferred to May and June.
Analysts said the boost from deferred sales is already starting to wind down in many markets where sales have begun to decline. The good news is that low mortgage rates should continue to support housing affordability and sales activity for a little while longer.
CREA figures show that the Montreal market has been on a pretty good run in the period since 2005.
The benchmark price for a two-storey single family home has climbed from $250,000 to over $375,000 during that period while the composite index including single family homes, townhouse units and apartments has risen from around $200,000 to $300,000.
Despite those gains, Montreal’s house price index continues to lag the national aggregate by almost nine per cent.
In its forecast for this year and next, CREA said sales activity in Quebec is expected to decline modestly from 2013 levels by just under one per cent this year.
Quebec recorded 71,202 home sales last year and is on track for 70,650 this year. Activity in 2015 should bounce back by 1.3 per cent.
The situation in Quebec was compounded by the uncertainty surrounding the provincial election in April, with some buyers in the Montreal area holding off on sale decisions until the election outcome was known.
Further dampening the Quebec market is the province’s lacklustre record of job creation this year along with rising taxes and disappointing economic growth.
Across the country, the boost from low mortgage rates will begin to dissipate next year as lending rates edge higher in tandem with an improving economy. Exports, business investment, job growth and incomes are all expected to improve as the recovery strengthens.
That should help to support house sales in soft markets. But it’s also true that Canadian household debt is at record levels and affordability is becoming more of an issue for buyers.
Still, the nationwide picture shows a balanced ratio of sales to listings and plenty of inventory. We’re not in bubble territory yet.