Canada’s resale home prices recover quickly

The speed with which the Canadian housing market has rebounded has exceeded all expectations.  Since the second quarter of 2009, the market for existing homes has regained momentum, and prices and sales are rising.

In August 2009, the average price of existing homes sold through the Multiple Listing Service® was CA$324,779 (US$303,614), up 11.3% from a year earlier, according to the Canadian Real Estate Association (CREA).
Home sales began rising in February 2009, and resale house prices started recovering in May 2009, driven by cheaper house prices, lower borrowing costs, and new government incentives.

“Low interest rates are boosting sales by homebuyers returning to the market, having moved to the sidelines late last year,” said Gregory Klump, CREA’s chief economist. “Buyers are shifting purchase decisions forward as they take advantage of attractive interest rates now, before financing costs increase.”

“The speed with which the Canadian resale housing market has rebounded is unprecedented.” added Klump.

Sellers began pulling their homes off the market in early-2009 in anticipation of a market recovery.  Housing supply dropped from 12.8 months of inventory in January 2009, to just 4.4 months in July 2009.

In 2008, resale house prices dropped by 0.7% from the previous year, as demand fell and consumer confidence weakened due to the global crisis. MLS® resale prices had risen by an annual average of 11% in 2006 and 2007.

Prices of residential properties could continue to rise in the second half of 2009, despite the weak economy, due to pent-up demand, improved consumer confidence, low supply, and low financing costs. In 2010, a full recovery of the housing market is expected, as the Canadian economy is projected to grow again by about 3%.

New houses lag the market

While prices of existing homes are rising, newly built home prices are still down on the previous year’s price levels. The new housing price index (NHPI) was 3.15% down in July 2009 (-2.2% in real terms) from a year ago, according to Statistics Canada.

Homebuyers have become more price-sensitive. Newly built-homes have generally higher prices, so homebuyers are shifting to low-priced existing homes.

However the prices of new homes unexpectedly rose in July 2009 by 0.3%, the first monthly increase since September 2008, signaling that even the new homes market is now stabilizing.

The NHPI rose by 55.8% (25.7% in real terms) from 1997 to 2007.

Alberta left behind

The highest house price rises are taking place in the small eastern province of Newfoundland and Labrador, up 12.7% during the year to August 2009, due to construction projects in minerals and energy.

In British Columbia, house prices rose 11.7% during the year to August.  Manitoba’s house prices rose 10.8% and New Brunswick’s 8.5% over the same period. British Columbia has Canada’s most expensive housing, with an average price of existing homes at CA$471,078 (US$440,379) in July 2009. Alberta and Ontario followed with average resale prices of CA$343,727 (US$321,327) and CA$313,512 (US$293,081). Prince Edward Island has Canada’s cheapest houses, with an average price of CA$146,259 (US$136,728) in July 2009.

Alberta is an exception however. In 2008, Alberta’s economy sputtered, as the global crisis spread. Oil and gas exploration projects were put on hold, while fuel prices dropped sharply. In 2009, Alberta’s house prices are forecast to drop by 4.4%.

Canada’s housing boom from 1996 to 2006 was led by the western provinces, caused by a  commodity-driven economic boom which sparked a dramatic rise in prices and housing activity.

• Resale house price increases 1996-2006 were highest in resource-rich Alberta (143%), followed by Quebec (97%), Nova Scotia (80%), British Columbia (79%) and Ontario (79%), according to CREA.
• House prices in Eastern Canada rose relatively sluggishly during the period 1996-2006. Newfoundland (49%) registered the lowest growth, followed by Prince Edward Island (49.5%) and New Brunswick (50.7%).

Strong rises in sales!

In August 2009, home sales via the MLS® were 18.5% up from the same period last year, to 42,483 homes, according to CREA.  Despite these gains, sales of existing homes during the whole year of 2009 are expected to be slightly down on 2008. Sales of existing homes in Canada peaked in 2007, when 520,747 housing units were sold.

In 2008, there were about 211,000 housing units started in Canada, down 7.6% from a year earlier, according to figures from Canadian Mortgage and Housing Corporation (CMHC).

"A rise in demand, along with fewer listings, has helped bring supply in balance with demand," says CREA president Dale Ripplinger.

Low mortgage rates

pushing demand up!

The Bank of Canada (BoC) reduced key rates six times in 2008, from 4% in January to 1.5% in December, following interest rate cuts in the US. Then the target rate was reduced three times more in 2009, to a record low of 0.25%, where it has remained since April 2009.

Mortgage rates have followed official rates down:

• The 1-year mortgage rate fell to 3.75% in August 2009, from 6.65% in August 2008.
• Interest rates on 3-year mortgages moved to 4.55% in August 2009, from 6.7% in the same period last year.
• 5-year mortgage rates moved to 5.85% in August 2009, from 6.85% a year earlier.

The BoC says that it intends to hold the current policy rate until end of second quarter of 2010.

Canada’s mortgage market is healthy

Canada’s conservative lending practices, once considered a weakness, helped it avoid contagion from the US subprime crisis.

Some notable differences between the Canadian and US mortgage markets:

• Loan prepayment is very expensive in Canada, whereas it is a free option in the US.
• Securitization rates are lower in Canada.
• In Canada, only about 30% of loans are initiated by brokers, as compared to around 70% in the US.
• In Canada, the lender has recourse to the other assets of the borrower, if the loan goes to foreclosure. In the US, this alternative is either expensive or illegal, especially for owner-occupied dwellings.  
• Canadian lenders offer fewer loan options.
• A typical mortgage loan in Canada is a five-year fixed-rate loan, amortized over 25 years; whereas in the US, most loans are for 30 years or more.

Up from 50% in 2007 to 54% of GDP, Canada’s domestic mortgage market grew surprisingly strongly in 2008, according to Statistics Canada.  In 2008, total outstanding residential mortgages rose 11.8% from a year earlier, the highest rate of growth since 1990.

Rental market strong

Canada’s rental market has remained strong.  During the year to April 2009, average rents across Canada increased by 2.9% to CA$804 (US$744) per month, despite a slight rise in rental vacancy rates to 2.8% in April 2009, from 2.6% in April 2008.

Rent increases were particularly strong in Saskatchewan (11.8%), British Columbia (8.9%) and Newfoundland (6%).

Vacancy rates across Canada’s metropolitan areas are expected to remain stable this year and in 2010, according to CMHC, due to strong rental demand caused by high immigration, and a large difference between rentals and homeownership costs.

Nevertheless, between 1998 and 2008, average rents for two-bedroom units rose only 30.5%, while house prices were up 99.3%.

Despite the large gap between rent and house price rises, rental yields are still high in Canada. According to Global Property Guide research, 55-sq. m. apartments in Montreal had gross rental returns of around 8.6% in November 2008. In international terms, this is quite high.

Economy still struggling

Canada’s economy was dragged down by the turmoil in the US, its largest trading partner.  Canada’s real GDP growth rate fell to just 0.5% in 2008, from a healthy annual average growth of 3% from 1992 to 2007.

• In Q4 2008, the economy slid into a recession.  GDP contracted at an annualized rate of 3.4%.
• In Q1 2009, the economy plunged an annualized 6.1%, the biggest drop on record.
• In Q2 2009, the Canadian economy contracted further by an annualized 3.4%.

Yet due to the rebound in housing resales and consumer spending, the economy grew 0.1% in June 2009, the first monthly increase since July 2008. The economy is expected to grow in the second half of 2009, largely due to government aid rather than solid economic fundamentals, but overall 2009 GDP growth will come in negative at -2%.

In August 2009, the country’s unemployment rate rose to 8.7%, the highest level since January 1998.

In 2009, the overall deficit is expected to hit CA$55.9 billion (US$51.7 billion), mainly due to increased unemployment benefit claims, slowing export revenues, and the auto industry bailout.

The Conservative government faces the possibility of a reelection this fall. Last September 18, 2009, the Conservatives survived a budget confidence vote in Parliament, averting an immediate election. However, the minority government faces another non-confidence vote in October, with the Liberal Party determined to oust it from power.

Economic recovery in Canada is expected to be slow and fragile with many obstacles looming. "While we see light at the end of the tunnel, we're still in the middle of a global economic recession," said Transport Minister John Baird. "A potential recovery is still both tentative and fragile."