HOUSING PRICE HITS RECORD

Canadian sales activity and the average price of a house rose  unexpectedly in January.

Canadian sales activity and the average price of a house rose unexpectedly in January.

Tim Shufelt, Financial Post · Wednesday, Feb. 16, 2011

http://www.financialpost.com/news/HOUSING+PRICE+HITS+RECORD/4291730/story.html

The resale housing market in Canada continues to defy all skeptics.

The average home price reached a record high last month and, with room yet to move, has renewed worries that a major correction looms.

For months, the predicted pullback in real estate has failed to materialize. But the market’s peak might finally be in sight, turning attention to the depth of the downside ahead.

“In the back half of this year, we’ll see the real estate market cool quite materially,” said Derek Holt, vice-president of economics at Scotia Capital.

On a seasonally adjusted basis, the average price of a Canadian house rose to $357,000 last month, an increase of 3.9% over the previous month, according to figures released by the Canadian Real Estate Association. On the same basis, sales activity rose 4.5%.

The urgency with which homebuyers are closing deals can be explained, at least in part, by impending market changes.

In response to rising yields in the bond market, lenders are beginning to raise the cost of borrowing.

Additionally, stiffer rules for mortgage lending are set to come into effect next month, lowering the maximum amortization from 35 years to 30 and requiring borrowers to meet a more stringent test by qualifying for a fixed-rate plan.

“I expect that to be a pretty sizeable force,” Mr. Holt said.

Already, consumers are looking to lock into mortgage agreements under the looser conditions, said Vince Gaetano, a principal broker with Monster Mortgage.

Those with a pre-approval who fail to act in time might have to accept a higher rate or settle for a smaller home, Mr. Gaetano said. He expects invigorated buying activity right up until the day the rules change.

“That last week is going to be an interesting one,” he said.

Until the market absorbs the changes, CREA has asked the federal government to hold off on any more mortgage revisions.

“It will take some time before the longer term impact of the latest mortgage regulations on the housing market can be known,” CREA president Georges Pahud said in a release.

“In the meantime … sales activity may heat up further as we get closer to the date on which tighter mortgage regulations come into effect, especially in some of Canada’s pricier markets,” Mr. Pahud said.

What happens after March 18 is the subject of much speculation. A recent Capital Economics report said the Canadian real estate market is at risk for a correction as big as 25%. And Yale professor Robert Shiller said Canada is due for a housing meltdown of the magnitude witnessed in the United States.

But aside from some elevated prices, housing fundamentals in Canada are fairly well-balanced, said Doug Porter, deputy chief economist at BMO Capital Markets.

Homebuilding is in line with household formation, sales-to-listings ratios are normal and the backlog of unsold homes is reasonable, he said.

“The reality in most of the country is likely to be on the mundane side in years ahead. Prices will struggle to rise, but I doubt they will correct severely.”

However, there is one exception to a national analysis: Vancouver. The average seasonally adjusted price there rose 18% in December alone, hitting $787,000, more than double the national average.

“It marches to its own drummer and it doesn’t seem to necessarily listen to the underlying market fundamentals,” Mr. Porter said.

However, Mr. Holt doesn’t agree with the consideration of Vancouver as a special case. All regions of the country have experienced big gains in housing over the past decade.

The pullback, likewise, will be nationwide, he said. “I could certainly see it losing momentum and coming down maybe five to 10%.”

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