Canadian home sales are edging back toward the levels they were at before Ottawa decided to tighten the market last summer.
For the first time in a year, the number of homes that changed hands over the Multiple Listing Service last month came in higher than one year earlier, driven by rebounding markets in Vancouver and Toronto.
The large gains are partly due to the fact that last month's sales are being compared with a weaker market. It was in July, 2012, that sales plunged after Finance Minister Jim Flaherty changed the rules, cutting the maximum length of an insured mortgage to 25 years from 30.
But the numbers show momentum nevertheless, and most economists expect sales to gain traction in the coming year.
Canada Mortgage and Housing Corp. said Thursday that, because of the weakness during the first half of this year, it forecasts about 448,900 sales of existing homes during 2013, down from 453,372 last year. But it expects sales to rise to about 467,600 units next year, with prices growing at roughly the same rate as inflation.
Royal Bank of Canada economist Robert Hogue said the next major test the market now faces will be in late 2014, when interest rates will likely rise at the same time as a large number of newly built condos come on stream.
"We expect that the combination of flattening demand later next year and strong supply of newly completed condo units will lead to some modest price declines in 2014, mostly centred in condo segments," he wrote in a research note.
While the market appears to be on a modest upward trajectory for the moment, there are some factors that could weigh on it this year. Mortgage rates are likely to trend up. The job market could continue to be worse than expected. And CMHC says that "lower population growth among the 25-to-34-year age group … will moderate growth in the pool of first-time home buyers."
"Higher mortgage rates of late have led to some erosion in affordability," Toronto-Dominion Bank economist Sonya Gulati wrote in a research note. "This should keep a lid on sales growth in the second half of the year, but positive annual sales gains are slated for 2014."
There also remains the possibility that if the market shows too much of a resurgence, the government will act to rein it in again.
"Sales dropped sharply in August last year, so we may see some year-over-year increases in sales and average prices next month that would reflect weakness in the rear view mirror," said Gregory Klump, chief economist of the Canadian Real Estate Association.
"Canadian home sales have staged a bit of a recovery in recent months after having declined in the wake of tightened mortgage rules and lending guidelines last year, but the numbers for July suggest that national activity is levelling off at what might best be described as average levels."
Home sales in the first seven months of this year are 4.6 per cent below the first seven months of 2012. The average selling price of existing homes in July was $382,373, up 8.4 per cent from a year earlier. CREA said much of that is because of the resurgence in Vancouver and Toronto, which tend to be pricier markets. The MLS Home Price Index, which attempts to adjust for any change in the type or location of homes that are selling, was up 2.7 per cent. That's a slightly faster pace than the 2.3-per-cent annual increase in June.
"A tightening [though not yet tight] market balance has put a floor under average prices, with 23 of 26 cities posting gains in the past year," Bank of Montreal economist Robert Kavcic wrote in a research note. Calgary, Winnipeg and Edmonton were among other markets that saw significant year-over-year sales increases last month, while Ottawa, Halifax and Montreal posted declines.