Housing market on solid footing

Preliminary December sales data from several cities indicate Canada's housing market is entering the new year in solid shape, with prices again showing more strength than economists expected.

After the protracted sales slump that hit the market in the summer of 2012, economists were surprised by the degree to which it rebounded during the latter half of last year. The spring market got a jolt from falling mortgage rates and, ironically, sales got an even bigger boost in the late summer and early fall from rising mortgage rates – which spooked some buyers into jumping into the market before rates rose further.

Changes in home prices typically lag changes in home sales, and so despite the pickup in sales, economists were still expecting that the lengthy downturn would eventually slow price growth down to a trickle. But it hasn't.

"Prices have been much stronger than we anticipated them to be," said Toronto-Dominion Bank real estate economist Diana Petramala.

A few large cities have now released data for December, which is traditionally a relatively slow month, and the figures point to a market that is far from a runaway train but continues to hold up better than anticipated.

The benchmark price of a single family home in the Calgary area is now $472,200, up 8.6 per cent from a year earlier. The benchmark in Vancouver is $603,400, up 2.1 per cent from a year earlier despite that city registering the steepest market correction in the past two years. The average price of homes that sold over the Multiple Listing Service in the Toronto area last month was $520,398, up by 8.9 per cent from the average selling price in December, 2012. The average selling price in Toronto for all of 2013 was $523,036, up 5.2 per cent from the average in 2012.

Economists had been expecting the large supply of condos that are coming on stream in cities such as Toronto to weigh significantly on prices, Ms. Petramala said. While that hasn't happened so far, she expects that it will over the next two years, noting that the number of condo units scheduled to be finished in Toronto this year is more than double historical levels.

"Heading into 2014, 2015, as some of these condos start to come on the market we should see price pressure ease," she said. She expects national home prices to grow by about 2 to 4 per cent over the next five years.

"According to pure economics, we should be seeing prices softening," said Canadian Imperial Bank of Commerce economist Benjamin Tal. "The fact that it is not happening suggests the market is more resilient than we thought."

The full national housing picture won't be known until the Canadian Real Estate Association discloses national numbers later this month – smaller cities and towns have not seen the same sales momentum as the country's urban centres of late – but the number of homes that changed hands in 2013 is now expected to come in slightly above 2012, defying expectations at the outset of 2013 that the market would register a decline.

Bank economists here shrug off a recent report by New York-based Deutsche Bank economists who say that Canada's house prices are 60 per cent too high and that "Canada is in trouble." There is widespread acknowledgment that house prices here are too high, but the severity of the overvaluation and the impact it will have are hotly debated.

"Saying that some pockets of the national housing market are overvalued by 20 or 25 per cent is not a stretch," Mr. Tal said. "But that doesn't mean that they'll go down by 20 or 25 per cent."

If price growth peters out or dips a bit while incomes and employment remain strong over a period of time, the situation could right itself, resulting in the soft landing that the central bank and federal Finance Minister continue to expect.

The number of homes that sold over the MLS in Toronto last month came in almost 14-per-cent higher than a year earlier, a level that is about 5-per-cent above the 10-year average according to Ms. Petramala. Calgary saw an 8-per-cent year-over-year increase in sales. Vancouver, where sales plunged the hardest in 2012, saw a 71-per-cent year-over-year gain, with its sales coming in 8.1 per cent above the 10-year average.