The surprising resilience of the country's housing market is renewing concerns that it could be overshooting.
Housing starts, sales and prices are once again defying expectations, one year after Finance Minister Jim Flaherty shocked the market with tighter mortgage insurance rules. The sector is showing such strength this summer that some economists are wondering whether Mr. Flaherty will go further in a bid to stem rising house prices and consumer debt levels.
"There may be some dusting off of potential measures to cool housing," Bank of Montreal economist Douglas Porter wrote in a research note. He thinks the market could be on the verge of running away again.
Both Mr. Flaherty and economists will have a better sense of where things stand on Thursday, when the Canadian Real Estate Association releases July's sales figures. Mr. Porter thinks the data will show that the number of existing homes changing hands is 10 per cent higher than this time last year, which would mean that they are "within striking distance of the record highs hit in 2007."
July data from some local real estate boards appear to back that assumption. Vancouver, for instance, saw a whopping 40.4-per-cent year-over-year increase in sales of existing homes over the Multiple Listing Service, while Toronto posted a still-impressive 16-per-cent gain. Calgary's sales were up 17 per cent from last year. (Not all markets are showing gains. Ottawa and Montreal each saw sales fall by about 2 per cent year over year).
Toronto-Dominion Bank economist Diana Petramala says sales have now recovered from the changes that Mr. Flaherty made to the mortgage insurance rules. "In Vancouver, sales have recovered to their highest level since 2010," she notes.
In addition to the changes that Ottawa made to the rules for consumers, such as cutting the maximum length of an insured mortgage to 25 years and doing away with mortgage insurance for homes worth more than $1-million, Mr. Flaherty has been taking steps to curtail the degree to which Canada Housing and Mortgage Corp., and therefore taxpayers, backstop the banks' activities. He has been worried that ultralow mortgage rates are adding too much fuel to the housing fire.
It's possible that the market's current strength is temporary.
Real estate associations and some economists wonder whether the strong sales in June and July were spurred by mortgage rates ticking up, prompting consumers to jump into the market before they rise further. The special five-year closed rate has risen 60 basis points since mid-June, and "home buyers with a preapproved mortgage are likely jumping into the market to take advantage of record-low interest rates," Ms. Petramala wrote in a research note. (A basis point is 1/100th of a percentage point.)
One part of the market that isn't rebounding yet is newly constructed homes. Sales of new condos in Toronto were down 18 per cent from a year ago in the second-quarter, Urbanation, which tracks the Toronto condo market, said last week. And the amount of residential land that developers bought to build houses and condos fell 51 per cent in Toronto, 30 per cent in Vancouver, and 52 per cent in Calgary during the first half of this year, according to RealNet Canada Inc. Developers continue to build an abundance of new houses and condos, even though TD economist Dina Ignjatovic believes there is an oversupply of 250,000 new homes, roughly one year's worth, that will hit the market in the next two years.
For now, house prices are on an upward trajectory that could reignite talk of a bubble. "After flirting with outright declines for much of 2012 and earlier this year, average home prices were up almost 5 per cent year over year in June, and we suspect the gain was closer to 6 per cent for July, the fastest pace in almost two years," Mr. Porter wrote.