Alex Carrick, Chief Economist – CanaData

The new housing price index (NHPI) in Canada inched ahead 0.1% in August versus September, according to Statistics Canada. It gained back the 0.1% month-to-month decline that was recorded in the previous period.

The nominal level of the index has recovered to just about where it was prior to the recession. New home prices were at a peak in early to mid 2008. In mid-2009, they were down 4.0%, but that drop has since been reclaimed.

The August year-over-year change in the NHPI nation-wide was +2.9%. The “house only” sub-component was +4.5% and “land only” was -0.2%.

In the months ahead, the NHPI will serve as a valuable indicator of where overall housing markets are headed.

The consensus of analysts is that residential real estate is in line for a correction through the end of this year and probably most of next year.

But how steep will the price adjustment be? The fact that new home prices are remaining firm, so far, is an early indication that the deterioration may not be as severe as perhaps feared.

For the sake of the economy, a soft landing would be most desirable.

There are several reasons to expect a slowing in housing demand.

Economic growth has clearly been moderating in both the U.S. and Canada. Potential buyers are becoming more cautious as they fret over their job prospects.

Resale home markets have softened considerably. When the Bank of Canada lowered its trend- setting interest rate to rock bottom in early 2009, demand was artificially stimulated in the residential real estate sector.

However, the era of record-low interest rates has now ended with three recent 25 basis point increases (where 100 basis points equals 1.00%) in the target overnight rate.

This is not to say that rates are anything but still exceptionally low. However, the perception is that they are more likely to rise than fall in the future.

Furthermore, the rules for mortgage approvals have been tightened, adding to the list of inhibiting factors for home sales.

Harmonized Sales Tax introductions in B.C. and Ontario are playing an interesting role in the NHPI. Formerly, provincial sales taxes on building materials were embedded in the price of new homes.

However, the NHPI is based on the market selling price less value-added taxes (e.g., the HST). In other words, the new HST applications introduce a downward bias to the NHPI.

Therefore the year-over-year change in the NHPI value understates what has happened in terms of the actual (tax included) selling prices that buyers have been seeing.

According to major cities, the largest year-over-year percentage increases have occurred in Regina (+6.1%), Winnipeg (+5.3%), St. John’s (+4.9%), Ottawa-Gatineau (+4.5%), Vancouver (+4.4%), Saskatoon (+3.8%) and Toronto-Oshawa (+3.5%).

The only declines have been recorded in Charlottetown (-2.2%), Sudbury-Thunder Bay (-1.8%), Windsor (-1.3%) and Victoria (-0.4%).

The NHPI is for single-family housing and does not take into consideration multi-unit properties. It is in the latter segment of the market where possibly significant price reductions are more likely to appear, given that there are large inventories of unsold condo units in several major cities.

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Contact the Jeffrey Team for more information  –  416-388-1960

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