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Vancouver home (DARRYL DYCK)
Vancouver home (DARRYL DYCK)

The economics of housing

How are housing markets in Calgary, Montreal and Ottawa holding up? Add to ...

In his fourth column for Globe Investor's month-long Home Buying site, Ben Rabidoux looks at real estate markets in large Canadian cities.

Five Canadian cities - Vancouver, Calgary, Toronto, Ottawa, and Montreal - account for nearly half of Canada’s population. A look at the health of their respective housing markets provides insights into the strength of the broader Canadian resale market.

1) Vancouver No other Canadian city (and few globally) exhibits such a disconnect between house prices and underlying fundamentals.

It appears that perhaps this disconnect is starting to weigh on demand for houses, with average resale prices falling 10 per cent on a year-over-year basis in April. The key trend to watch for now is how sales will perform relative to the inventory of existing homes on the market. Sales are near decade lows while inventory remains near decade highs for this time of year. In fact, the last time there was such an imbalance between supply and demand was in 2009 when interest rates were falling through the floor and the CMHC was taking unprecedented liquidity measures to keep mortgage credit flowing. Today rates are hovering near all-time lows while mortgage credit is being tightened. I don’t see much in the near term to reinvigorate demand.

2) Calgary Calgary underwent a market correction staring in 2007. Resale prices have nearly returned to their previous highs but the fundamentals remain stretched. I often liken Calgary real estate to a high price-to-earnings growth stock where future earnings potential is being reflected in current prices. In Calgary, it’s clear that prices reflect the popular belief that the province will continue to experience strong economic growth. If this happens, it’s possible that prices will continue to move sideways - or slowly rise - while fundamentals catch up. But if the expected economic growth fails to materialize, there would be quite a bit of dead air between prices and underlying fundamentals.

In terms of supply and demand, the city looks pretty strong with sales rebounding off their lows but still well below the highs of the boom years. Inventory levels also remain healthy suggesting that over the short term, there is strong support for resale prices in the city. In April, resale prices rose a paltry 0.8 per cent on a year-over-year basis but this pace could quicken slightly in the coming months.

3) Ottawa As with all other large Canadian cities, resale prices in the nation’s capital have gotten a bit ahead of themselves.

Sales remain quite robust but an interesting trend that has emerged over the past few months has been an unusually high amount of new listings. Should this trend persist, causing inventory to build, I would expect it to pressure resale prices. The average resale price in Ottawa in April rose 3.4 per cent on a year-over-year basis.

4) Toronto The red-hot detached segment continues to propel average resale figures higher as that segment once again posted more-than-10 per cent year-over-year gain in April. The once-hot condo market has cooled with resale prices rising 2.8 per cent on a year-over-year basis, a trend I expect will persist. Resale prices in Toronto have outpaced fundamentals and a “cool off” period is certainly long overdue.

But that won’t happen until supply and demand return to more historic levels. The lack of inventory in the city relative to past years is incredible. This, coupled with ongoing strength in the resale market, should continue to send resale prices higher in the short term although a nice rebound in new listings in the past few months should relieve some pressure, if that trend continues.

5) Montreal Canada’s second largest city often flies under the radar in discussions of regional bubbles, but the fundamentals here are very concerning.

On the supply/demand front, there is currently substantially more inventory on this market than ever before. The saving grace has been a very strong resale market that pushed the average price up 3.5 per cent in April. This is a market that needs demand to remain very robust as any hiccup in sales will leave an extreme imbalance in supply and demand that would pressure prices in short order.

Mr. Rabidoux, an analyst and strategist with M Hanson Advisors - a market research firm catering to institutional investors, covers Canadian macro economic trends with a focus on housing and consumer credit. He also has a website, TheEconomicAnalyst.com.

For tips, stories, videos and live chats about what's going on in the real estate market, check out the Globe's Home Buying section for daily updates.

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