The decline in house prices that has hit Vancouver is spreading to Toronto, a shift that economists say marks the beginning of a national price correction.
While many say the market has long been due for a correction, and that a healthy and gradual decline in prices is ahead, the new numbers are fuel for those who argue that federal Finance Minister Jim Flaherty's moves to cool the market went too far this summer.
Prices in Toronto dipped 0.6 per cent in October from September, the first monthly decline since the end of last year, according to the house price index compiled by Teranet and National Bank of Canada.
It comes after sales began to soften this summer, a trend that has continued. Sales in the Greater Toronto Area during the first two weeks of November were 17.5 per cent lower than the same period last year, according to the local realtors board, which has pointed out that Mr. Flaherty's decision to cut the maximum length of an insured mortgage to 25 years means higher payments.
A number of other cities, including Quebec City, Victoria, Ottawa and Montreal, also saw prices fall in October. Nationally, prices were 0.2 per cent lower than in September.
Craig Alexander, chief economist at Toronto-Dominion Bank, said he was struck by how broad the declines were. "It's no longer just about Vancouver."
Vancouver's prices actually ticked up 0.1 per cent in October from September, but remain one per cent below where they were a year ago.
Nationally, house prices are still 3.4 per cent higher than a year earlier, but the year-over-year gains have been shrinking. The data suggest that the market is shifting toward negative territory.
A number of economists are optimistic that, barring any significant increase in unemployment or interest rates, house prices will nudge down gradually over the next year.
"We are starting to see the beginning of a negative trend in the housing market in Canada, but I think it will be a gradual and somewhat controlled slowdown," said Canadian Imperial Bank of Commerce economist Benjamin Tal. That's the outcome that Mr. Flaherty and Bank of Canada Governor Mark Carney are hoping for, as they've sought to take some of the froth out of the market now to prevent a crash down the road, and to keep consumers' mortgage debt levels in check.
Marc Pinsonneault, an economist at National Bank who works on the Teranet-National Bank national house price index, said that if the data are adjusted for seasonal factors, then home prices were flat in October compared to September. But even that is newsworthy, he adds. (While the average price of houses sold can be influenced by a shift in sales towards certain neighbourhoods or types of homes, the Teranet-National Bank Composite House Price Index seeks to account for that by, among other things, only including homes that have changed hands at least twice in their history and have not been renovated.)
"We wouldn't be surprised to see prices in Toronto down 5 per cent from where they are at the moment at the end of 2013," he said. However, prices have risen 6.4 per cent in the past year. "We think it will be a price decline consistent with a soft landing of the resale market," Mr. Pinsonneault said.
But some economists, and a number of real estate industry players, say the softening could be more severe and protracted than desired. This week, Will Dunning, the chief economist at the Canadian Association of Accredited Mortgage Professionals, said he thinks Mr. Flaherty's rule changes are jeopardizing the health of the market and the economy, and will continue to have an impact for years to come.
"Home prices have held up so far, prompting economists to declare a soft landing," David Madani, an economist at Capital Economics who has long been predicting a 25-per-cent national price correction, wrote in a note Wednesday. "But we think this is premature."
Data from RealNet Canada Inc. Wednesday showed that 2,792 newly constructed homes were sold in October, the second-lowest sales for that month for the 13 years on record. Of those, 1,914 were condominiums. The Building Industry and Land Development Association, which represents developers, blames Mr. Flaherty for the decline.
"In an attempt to cool down the market, the federal government has severely affected the building and development industry in the GTA," CEO Bryan Tuckey said in a press release. "The introduction of stricter mortgage regulations has triggered a decline in new home sales, and if this trend continues, it will affect job creation in the coming years, restricting economic growth."
The softening prices, coupled with rising household incomes, has made homes slightly more affordable, according to Royal Bank of Canada. "Despite the improvement, the latest readings still point to slightly greater-than-average affordability pressures in Canada, with such imbalances being somewhat more intense in the two-storey home segment," RBC says in a housing affordability report to be released Thursday.