Home sales rise for 6th consecutive month

By Romana King on July 27, 2011
Estimated reading time: 2 minutes

Strong sales and low interest rates keep the Canadian housing market afloat, for now. But even CREA can't ignore the signs of a tightening market in Toronto and the post-peak sub-zero performance of the Calgary market.

For the sixth consecutive month, home prices across Canada increased by 1.3% in May, according to the Teranet-National Bank National Composite House Price Index. The increase comes on the heals of an April report that showed housing prices were up in all six of the major metropolitan markets, which include Toronto, Montreal, Ottawa, Calgary, Vancouver and Halifax.

Vancouver: May’s increase marked the eighth consecutive monthly increase;
Toronto: home prices topped the peak (which was originally achieved in July 2010);
Calgary: while prices continued to rise, the average home price was still 4.6% below their previous peak;
Ottawa: prices were fractionally higher in May than the city’s home price peak in August 2010.

While this activity might sound exciting to prospective sellers, recent numbers may not be reflective of a continuing strong market. That’s because of the time lag between home sales and their entry into public land registries. Because of this lag, it’s possible that the large April and May increases in the home price index were due to March sales. Sales rose in March — theoretically to beat the effective date for the shortening of the maximum amortization period (from 35 years to 30 years) for insured mortgages. What’s also significant is that the Canadian Real Estate Association has publicly stated that, while conditions were “balanced” across the country, the market is beginning to tighten in Toronto. This is evident from the city’s year-to-year price change, which was second last (at 4.6%) behind Calgary with its -4.1% year-to-year price change. Still, CREA is sticking to its assessment: Canada is experiencing a balanced housing market — with no advantage going to either buyer or seller. The primary rational for this assessment is that the national sales-to-new listings ratio (CREA’s measure of market balance) was at 52.6% in June, slightly higher than May’s 52.2%. CREA also points out that 80% of the local housing markets in Canada experienced a year-over-year price increase in June (including Toronto where there is a “tight balance between supply and demand”). But the bottom line is that supply is beginning to match demand — demand that’s fuelled by low interest rates. When interest rates rise the demand for houses will drop dramatically, putting severe downward pressure on housing prices. While that correction may not be for 12 months (or longer), it will come. As soon as cheap lending for expensive houses disappears, buyers will settle in to renting-and-saving. And this will prompt a price correction. So if you can wait to buy. Wait. Sock your money away in a money market fund and save for that bigger down payment. You’ll own more of your house straight out of the gate (and probably buy that house at a cheaper price).