The flicker of optimism that sparked in Canada's housing market when January sales outpaced December's has died out, erased by a notable drop in February.
Last month's declines were significant enough to prompt the Canadian Real Estate Association (CREA) to cut its sales outlook for 2013 on Friday for the third time since last summer.
The number of homes that changed hands across the country over the Multiple Listing Service in February came in 15.8-per-cent lower than a year ago, and 2.1-per-cent lower than January.
The association is now forecasting 441,500 sales this year, a decline of 2.9 per cent from 2012. Just two months ago, it had said it expected 447,400 sales this year, and in September it had estimated 457,800 – a figure that it had already cut.
The less-than-stellar February data come as Finance Minister Jim Flaherty is in the final stages of preparing the federal budget, to be released on Thursday. Mortgage brokers and other industry players are lobbying for new measures to spur first-time buyers back into the housing market.
But some economists cautioned Friday that the spring selling season, which is just starting, will be a key determinant of the state of the market and that sales might still surprise if low mortgage rates and pent-up demand push buyers back in.
Canadian home buyers "come out of hibernation and start shopping March through July … cooling off once the kids need to be settled in back to school come September," economists at Bank of Nova Scotia noted in a research note.
Mr. Flaherty must balance his desire to keep house prices and debt levels in check with his desire to keep the economy growing, given that housing has played a significant role in keeping the economy humming since the financial crisis. New data from Statistics Canada on Friday showed that the debt-to-income ratio hit a new high of 165 per cent in the fourth quarter, with mortgage debt growing by $11-billion. But the pace of growth in household debt is slowing.
"A slowing in credit growth is a welcome development for Canadian policy makers who have long been ringing the warning bell about the potential danger that excessive leverage poses to the financial system and, more broadly, the economy as a whole," Royal Bank of Canada economists wrote Friday, adding that the slowdown "allows policy makers to focus their efforts on supporting the tenuous economic recovery."
CREA cut its forecast for the national average house price this year, after February's average sale price came in 1-per-cent lower than a year earlier. It now expects a national average of $362,600, down 0.2 per cent from last year.
The association's MLS Home Price Index, which seeks to give a more accurate gauge by accounting for changes in the types of homes that are selling, rose 2.7 per cent in February, its smallest increase since the spring of 2011.
"While largely flat at the national level, gains in excess of inflation are still expected in the Prairies and Newfoundland," it said. British Columbia, Ontario and New Brunswick are expected to post declines in average prices this year.
"Vancouver remains the clear weak spot, with sales down a seasonally adjusted 9.8 per cent in February and 29.2 per cent in the past year," Bank of Montreal economist Robert Kavcic wrote in a research note.
But some feel that much of Vancouver's weakness has played out, and some experts are increasingly focused on other parts of the country.
"Alberta and Manitoba are the only provinces where sales are expected to rise in 2013, albeit modestly," CREA said.
It expects Saskatchewan, Ontario, Quebec and Nova Scotia to see declines in year-over-year sales that are greater than the national average, while the year-over-year decline in British Columbia, New Brunswick, and Newfoundland and Labrador is forecast to be below the national average.
British Columbia and New Brunswick saw their markets weaken in early 2012, while markets in most of the country were strong, mitigating the relative size of year-over-year declines.