MLS real estate sign.Deborah Baic/The Globe and Mail
Buyers backed away from Canada's housing market in May, driving sales lower in what is traditionally the busiest month of the year for the country's real estate agents.
The housing market has been key to Canada's economic recovery, as low interest rates and pent-up demand drove buyers into the market after months of stagnation in 2008. But with interest rates likely heading higher in the second half of the year, many buyers who would have preferred to buy in the fall or early winter chose to buy sooner.
Tougher mortgage rules imposed by the federal government in mid-April also prompted buyers to act sooner, the Canadian Real Estate Association said. Meanwhile, tens of thousands of homeowners have seen the rampant demand and listed their houses for sale to take advantage of high prices.
Sales fell to 8.5 per cent to 40,393 units in May compared with April. Sales remain elevated by historical markers, but are 15 per lower than last fall's peak.
Prices were essentially flat in May, gaining 0.5 per cent to an average national resale price of $346,881 - the highest on record.
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With demand ebbing, many economists and industry associations expect prices to begin a descent through the end of the year. CREA said earlier this month that prices would likely end 2010 with overall gains of 1.6 per cent over 2009, but that means prices would need to fall 6 per cent from current levels to reach the trade association's target of $325,400.
TD Bank senior economist Pascal Gauthier said prices could fall as much as 10 per cent by the end of 2011, causing ripples through the economy at a time when mortgage rates move higher and make it more expensive for homeowners to pay down their debts.
"There's a psychological impact when prices are falling that you can see trickle into retail spending and the like," he said. "I think we've hit a peak in prices, and we won't see much growth until the end of 2012."
CREA said May's pullback in sales was "a departure from the normal seasonal pattern," adding that the number of new listings also decreased in May for the first time in a year and a half as fewer homeowners looked to sell.
With the average sale price sitting at record highs, many have also been priced out of the market, especially in the markets that saw the sharpest declines in sales - Ottawa, Toronto and Vancouver.
At the end of May there were 6.1 months of inventory on the market, the highest level since April, 2009. As prices fall, CREA economist Gregory Klump said sales may begin to increase again.
"The number of months of inventory may rise further in response to easing sales activity and a further rise in the number of active listings," Mr. Klump said.
Mortgage lenders such as Street Capital said the new rules - which force those seeking variable rate mortgages to qualify at a five-year fixed rate to ensure they could afford to pay if interest rates increase - have tempered demand from buyers.
And because anyone who qualified prior to mid-April had three months to shop around, some opted to buy quickly and skirt the incoming rules rather than extend their search for several months to find their dream home.
It doesn't bode well for the rest of the year.
"The changes haven't killed the market, but they have certainly taken out a lot of the steam," said Paul Grewal, Street Capital's president. "It's quite quiet right now for June - this is when we should be seeing a lot of paperwork happening and deals being done. That's not really happening."