Canada housing market down, but not out
Ka Yan Ng – Reuters
Canada’s housing market faces a sharp downturn in 2009 as the global financial crisis takes its toll, but the chances of a real estate implosion like that one that struck the U.S. housing sector look remote.
Canadian housing enjoyed record activity in 2007 and for much of 2008. By autumn, however, as global financial markets sunk, job losses mounted and consumer confidence swooned, the shine had clearly come off the property market.
In November, new home construction suffered its biggest monthly drop in seven years, while the national average home price in October dropped to C$281,133, 10 percent less than in the same month last year.
The situation may grow worse before it gets better. Economists say the housing market won’t recover until its main drivers – strong employment levels, rising incomes and a growing economy – regain their stride.
That may mean slower housing activity could last through the first half of 2009 or beyond if the global financial crisis maintains its grip on the Canadian economy.
“Before it gets better you’re going to have to see some clear signs that the economy is walking and running again,” said Robert Hogue, senior economist at Royal Bank of Canada.
“You would need a better economy, household confidence to pick up and then … households will feel in a stronger position to make the leap into the real estate market.”
A slowing housing market isn’t all bad news. It could mean more choice and more affordable dwellings for prospective buyers. On the flipside, a housing slump can put a further drag on a slowing economy as fewer consumers build, renovate and furnish homes.
In 2009, Canadian new home construction is expected to slip below the historically high level of 200,000 units for the first time in seven years, according to Canada Mortgage and Housing Corp, the federal government’s housing agency.
CMHC forecasts housing starts to fall to about 178,000 units next year, which it says would be more in line with demographic fundamentals.
Sales of previously owned homes will slip 3 percent to 447,300 units in 2009, the Canadian Real Estate Association forecast, after record sales of 520,747 units in 2007. The average price of a home is expected to drop by 2.1 percent to C$297,600.
“There have been very weak reports coming out of resale markets in the last while. I’m wondering to what extent that is a short-term overreaction to the level of distraction that is out in financial markets,” said Will Dunning, an economic consultant that specializes in the housing market.
“But I think in general we are going to see quite weak housing markets in 2009.”
Dunning said his view of the Canadian economy has turned from “fairly sanguine” to “quite negative” in part because consumer spending has slowed as the value of real estate and stock portfolios evaporates.
That said, most experts expect the Canadian property market to avoid a meltdown that mirrors the U.S. crash, partially because subprime mortgages make up a much smaller percentage of home loans in Canada. During the U.S. housing boom, subprime mortgages enabled millions of consumers with poor credit histories to buy homes that they could not afford.
“We don’t have a subprime situation. It’s just a recessionary situation,” CIBC World Markets senior economist Benjamin Tal said. “So it’s a correction, not a freefall.”
That’s not to say some pockets of the country won’t get hit harder than others. The price chill is likely to be greatest in the western provinces of British Columbia and Alberta, where housing prices surged along with the boom in commodities and a migration of people looking for employment.
“Given that we’re in a recession, that means house prices will be correcting,” Tal said. “And they will be correcting more in the West because when you double the value of your real estate during the course of breakfast … affordability becomes an issue.”
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