Canada’s hot housing market showed signs of cooling on Thursday as July housing starts slowed more sharply than expected, but housing prices were still climbing in June and analysts said a real slowdown may not come until late in 2012.

Ground breaking on new homes fell to a seasonally adjusted annual rate of 208,500 units in July, according to the Canadian Mortgage and Housing Corp, a sharp slowdown from the 222,100 units in June and below the forecasts of analysts in a Reuters poll, who had expected 213,300 starts.

It was the first time in seven months that the rate of starts fell below the six-month trend, and a government decision to tighten mortgage lending from July was expected to contribute to further slowing as 2012 draws to a close.

“We do expect that the impact of tighter mortgage regulations announced in late June will slow housing demand, but the impact on the construction and starts data is unlikely to show up until later in the year,” David Tulk, chief Canada macro strategist for TD Securities, said in a research note.

This week, Scotiabank forecast that home prices in Canada will fall 10% over the next two to three years. But other economists have predicted as much as a 25% correction.

The hot market has sparked fears of a bubble, particularly in Toronto, Canada’s largest city, and in Vancouver, as low interest rates fueled condominium building and double-digit annual price increases for existing homes.

The bulk of the pullback in July housing starts came in the multiple unit segment, where starts in the volatile condo market in British Columbia braked. That was in line with earlier data that has shown cooling in the Vancouver real estate market.

Multiple unit starts dropped 7.6% to 123,000 annualized units, the lowest level since February. Single unit starts fell 4.0% to 64,000 annualized units.

The slowdown in July pushed starts below the average for the second quarter and suggested the housing sector may not drive Canadian gross domestic product growth for much longer.

Mindful of the U.S. housing boom that was left unchecked until it burst, the Canadian government in July tightened conditions for homebuyers and mortgage lenders in a bid to deflate a possible bubble before it pops. The changes took effect in July.

This week Bank of Canada Mark Carney also stressed that despite global economic turmoil, interest rate hikes were still on the table in Canada.

Other data showed that prices of new homes in Canada rose by 0.2% in June, the 15th consecutive month-on-month increase, and continued strength in large cities such as Toronto and Calgary, Statistics Canada data showed.

The advance matched market expectations and follows the 0.3% month-on-month-gain in May.

Prices in Toronto, which accounts for 26.6% of the entire market, rose 0.3% in June, while prices in Calgary, where the booming energy industry has fueled demand, were up by 0.5%. New housing prices rose in 13 metropolitan regions, were unchanged in six and fell in two. Prices in June 2012 increased by 2.3% from June 2011 compared to the 2.4% year-on-year advance recorded in May 2012.

Source: Andrea Hopkins, Reuters

The number of Canadian homes sold last month dropped more than four per cent from the level in June 2011, the first year-over-year decline in sales volume since April 2011, the Canadian Real Estate Association said Monday.

Resales of homes were also down 1.3 per cent in June from May — the second month-to-month decline — with a total of 46,444 transactions through CREA members. That was down from 48,591 in June 2011, the association said.

The national average home price in June was $369,339, down 0.8 per cent from the same month last year, CREA said.

However, CREA said its MLS Home Price Index — which the association says is a better measure because it adjusts for different types of properties sold — increased 5.1 per cent between May and June 2012.

Prices increased in Calgary, remained strong in Toronto and continued to slow in Vancouver.

“Canada’s housing market lost a little altitude in June, but it’s still flying pretty high,” association president Wayne Moen said in a news release.

“That said, sales activity and average prices bucked the national easing trend in a number of markets, which underscores that all real estate is local,” Moen said.

There have been several reports saying some real estate markets and some types of housing are over valued, although there’s a range of opinions about how much and how quickly prices will decline.

Economists and consumers have been closely watching for signs that demand has softened to the point where prices will start going down.

But the association, which represents real-estate boards and associations that handle most of the country’s property transactions through the MLS system, said Monday the decline in sales activity and an increase in new listings resulted in a “more balanced” national housing market in June.

The number of newly listed homes rose 1.4 per cent in June compared to May, led by the Toronto market. Some 42 local markets, out of 100 markets across the country, registered a monthly increase in new listings of at least one per cent, the association said.

In the first half of 2012, a total of 257,193 homes traded hands over Canadian MLS Systems, up 4.7 per cent from the same period in 2011.

Gregory Klump, CREA’s chief economist, said home buyers didn’t rush to make purchases before the latest restrictions on mortgage regulations came into effect in July.

“That’s a big change compared to what we saw as a response to previously announced changes,” Klump said.

“It will take some time before the compound effect of previous and recent changes to regulations on Canada’s housing market becomes apparent.”

Under new mortgage rules announced in June by Finance Minister Jim Flaherty, borrowers will be allowed to use up to 80 per cent of their property’s value as collateral for home-equity loans, down from 85 per cent.

In addition, the maximum amortization period dropped to 25 years from 30 years for government insured mortgages.

Flaherty also said government-backed mortgage insurance will be limited to homes with a purchase price of less than $1 million.

Source: LuAnn LaSalle, The Canadian Press

Numbers may not lie, but they can certainly tell different versions of the truth.

Take the year-to-date sales numbers released by the Building Industry and Land Development Association (BILD) for new homes and condos sold across the Greater Toronto Area between January and May. During that time, 8,924 new high-rise units were sold — down 22.4% from last year. Low-rise sales during the same period, though, were up 1.6%, at 8,040 sales.

All of that would seem to signify a bad year for the new high-rise market, and a good year for low-rise — except that’s not the case, says George Carras, president of market analysis firm RealNet Canada, which provided the data to BILD. “It’s down [from last year], but relative to the last 12 years it’s the second best year,” he says of the high-rise market. “In fact, when you do the average of the last 12 years, you’re about 37% above average. You’re still seeing on a relative basis very strong sales over the long term.”

Low-rise, though, is a different story. Though sales of new low-rise homes were higher than last year, they were down 25% compared to long-term averages, Mr. Carras says.

Put low-rise and high-rise sales together, though, and what do you come up with? A pretty average year so far, he admits — down 12.7% from 2011’s record numbers. Overall, sales from January to May were at 16,964 units sold, compared with long-term average sales of 17,293 during the same time. “You’re almost right on average in total,” he says.

“The main difference, of course, is the shift in the kind of housing. And that’s continuing.”

Another difference is price. With supply down in the low-rise sector, prices are rising there. RealNet calculated the average index price for a low-rise home at $607,893 in May, “the first time it’s ever gone beyond $600,000,” Mr. Carras says. In the high-rise sector, meanwhile, prices have been levelling off in general, though did rise in May to $439,549. “You usually look at a price gap between low-rise and high-rise, and in the long-term it tended to be about $78,000,” he says. “This is the widest gap on record.”

Affordability continues to drive the high-rise market, adds Jasmine Cracknell, partner with Toronto real-estate consulting firm N. Barry Lyon Consultants Limited. The June 21 announcement by Finance Minister Jim Flaherty, reducing the maximum mortgage amortization period to 25 years from 30 years, will see that trend continue, she predicts.

“Affordability will be much more critical … now somebody who qualified for a 700-square-foot condo before will have to get a 600-square-foot condo,” she says. “Some people’s expectations might have to be lowered in terms of what they can afford.”

The result, she adds, will be a market slowdown — the very intention of the change. Did Toronto, specifically, need it, though? Ms. Cracknell doesn’t think so. “It was slowing anyway,” she says.

Source: Lisa Van de Ven, National Post

Many a child has delighted in popping a wad of Bazooka gum in their mouth, chewing vigorously, and then trying to blow the biggest bubble possible. The resulting end is inevitable – a sudden burst and then pulling the pink gum off their face.

Housing bubbles are not as much fun. But they can be just as sticky, messy and unpredictable.

Bubbles are as difficult to define as they are to spot. However here are a few definitions: Unsustainable patterns of price changes; deviations in prices that can’t be explained by fundamentals; and the mass refusal to acknowledge reason. We often don’t know with certainty that a bubble has existed until after it has burst.

The typical pattern of a housing bubble starts with price increases that are associated with euphoria as homeowners become wealthier. As wealth continues to increase, a mania may occur, and more buyers rush in as further price increases are forecast.

Eventually an event occurs – perhaps a change in government policy, increased interest rates, or a reassessment of market values – that leads to a pause in price increases. Some investors who borrowed heavily may find themselves under water, unable to make mortgage payments, and forced into distress sales. As prices decline, a crash and panic may follow.

During the 2008-2009 financial crisis, Canadian house prices fell by only 8 per cent – and then recovered by 2010. House prices have doubled since 2002, with annual growth of 5 per cent above consumer inflation. Vancouver, Victoria, and Toronto rose at much faster rates. With the current high prices in these cities – even with some recent weaknesses – have they been experiencing bubble-like symptoms? By two conventional metrics, the answer is yes.

The first measure is the price-to-income affordability index: The average house price relative to average disposable income in that city. The higher this ratio, the less affordable a house becomes and the more susceptible the market is for a decline in prices.

Over the past 25 years, the ratio in Canada has been about 3.5 times, but has recently been 4.5 times – almost 30 per cent higher. Since 2007, this ratio has grown faster in Canada than in almost every other major developed country. Recently in Toronto and Victoria the ratio was over eight times, and in Vancouver, despite recent price drops, about 10 times.

The other measure is the price-to-rent index, which is analogous to the price-earnings ratio for stocks: how much it costs to buy a house relative to annual rents (rents are like the earnings one could derive from owning a stock). Since 2007, this ratio is up 20 per cent, which again is among the fastest in developed countries.

According to recent analysis by the Economist, Canadian house prices are overvalued by 32 per cent relative to income, and by 76 per cent relative to rents, for an overall average overvaluation of 54 per cent compared with long-term averages. Only a handful of countries such as Belgium, Hong Kong and Singapore were more overvalued.

The key lesson we learn from history is that housing bubbles do burst. In Finland, house prices almost doubled between 1987 and 1989, but by 1992 were about 50 per cent off the 1989 peak. Japan experienced a real estate bubble between 1985 and 1990. House prices in Britain have declined by more than 20 per cent from their recent peak, in Spain by more than 25 per cent, in the U.S. by more than 40 per cent and in Ireland by 50 per cent.

Closer to home we have previously witnessed large price drops with slow recoveries. In Vancouver, prices dropped from 1995 to 1999, and it took until 2003 for prices to surpass previous peaks. In Toronto, prices dropped from 1989 to 1996, and it took until 2001 for prices to recover.

There are several key lessons for potential buyers, particularly in hot markets. Keep your emotions in check when considering a house purchase and don’t feel pressured to rush in; consider saving and waiting a few years. Ask yourself if you can service your mortgage under a scenario with interest rates 2 to 3 per cent higher than currently, especially in three to five years or when you may need to renew your mortgage. Consider your horizon: Don’t equate speculative short-term flipping strategies with long-term home ownership.

It is extremely difficult to know why or when a bubble of any kind is about to burst. Perhaps the recently announced rule-tightening related to government-insured mortgages could be a catalyst. Remember that it was more than three years before the bursting of what we now call the tech bubble that Federal Reserve Board Chairman Alan Greenspan made his famed cautionary speech about “irrational exuberance” in stock markets. As Mark Twain noted, history may not repeat but it sure does rhyme. Let’s keep in mind that bubble rhymes with trouble, as well as rubble.

Source: Stephen Foerster, The Globe and Mail

Although one prominent forecaster recently warned that a substantial drop in housing prices is on the horizon, other analysts continue to have a more optimistic outlook.

More likely, the average price in Canada will be about flat for the foreseeable future, says economist Robert Hogue, who follows real estate for the Royal Bank of Canada.

Hogue agreed with Craig Alexander, chief economist at the TD Bank, that home prices have outrun income growth for years, bringing a decline of 10 to 15 per cent within the realm of possibility.

But he didn’t agree with Alexander that such a drop is probable — or that tough new mortgage-lending rules will be enough to trigger it now.

Economist Adrienne Warren at the Bank of Nova Scotia is also moderately optimistic. New rules that require an insured mortgage to be paid off more quickly will increase mortgage payments, but “I think this will just cool the market faster for first-time buyers,” not tip prices into a decline, Warren believes.

That’s not to say that prices will remain steady across the country. Homes in Vancouver are out of reach for many and those in Toronto seem headed in that direction, making these cities considerably more vulnerable to a fall in values.

But Montreal and most other cities are not significantly overvalued as long as mortgage rates remain low, says Sal Guatieri, an economist at BMO Capital Markets. “What that means is that the market has time to correct,” he believes, without the need for a big reversal.

Outside of the two highest-priced markets, Guatieri thinks national home price gains will sputter to a halt over the coming year, then plateau for a few years.

Indeed, most analysts had expected to see prices stabilizing earlier this year. This hasn’t happened, perhaps because warm weather and promotional rates on mortgages in the spring stimulated some sales that would otherwise have occurred this summer.

But sales figures for May showed a sales drop in most cities, including Toronto and Vancouver, while the average national price advanced by a moderate 5.2 per cent. True, Toronto sprinted ahead by 7.9 per cent, but Vancouver prices rose by just 3.3 per cent and those in Montreal by 2.2 per cent.

Warren thinks it would likely take a recession to tip prices into a significant decline across Canada. That’s not the prediction of most forecasters, who see modest growth continuing.

A more typical pattern in a moderately overvalued market like Canada’s, she says, would be “a long period of weak price gains” until rising incomes caught up with steadier home values. In the past, such stagnation has lasted for as much as a decade, she notes.

And even in this scenario, markets in resource-rich areas like Alberta and Saskatchewan could keep seeing gains if commodity markets remain healthy.

It’s important to note that the difference between Alexander’s prediction of a price drop and other analysts’ scenario of stagnant prices is merely a question of how fast prices will adjust, not whether they will.

There’s widespread agreement that Alexander’s estimate of average overvaluation in Canada is close to the mark – somewhere close to 10 or 15 per cent. There’s also general agreement that Vancouver and Toronto are the most overvalued markets.

The disagreement is about how the real estate market will react as Canadians approach the limit of their borrowing power – just as new lending rules make a mortgage even more expensive to carry. Both will make the number of eager buyers dwindle.

There’s no doubt that in an expensive housing market, prices can fall. But usually, there’s a clear cause: Canada’s recession brought a one-year slump, while irresponsible lending, speculation and a banking crisis in the U.S. created a much deeper crash that has yet to heal.

But without a powerful prod, homeowners are famously stubborn about avoiding a loss. Many will simply hold off selling if prices are too far below what they expected.

“There’s very little pressure on homeowners” apart from the few forced to sell by a transfer or loss of a job, notes Guatieri. So the market normally just stagnates for a while.

But stagnation isn’t the same thing as avoiding a loss; it’s merely a way of slowing it down. Every year that a home’s price rises by less than the rate of inflation, its true value falls a little. Meanwhile, incomes creep up. After a while — maybe a long while — the market returns to balance.

Source: Jay Bryan, PostMedia News

Good news for homeowners and buyers as the CIBC says Canadians may enjoy historically low interest rates into 2014.

The bank released its new outlook for the global and Canadian economies, and all indicators point to weakening conditions and rising risks.

It says Canada’s economy will barely keep its head above water with growth rates of 2.1 per cent this year and next year, after growing 2.4 in 2011 and over three per cent in 2010.

The main reason, the bank says, is that the global economy will continue to slow, down to three per cent this year, the slowest pace of expansion since the recession.

As well, Canadian consumers are tapped out and governments are spending less.

With this backdrop the Bank of Canada will find it difficult to raise interest rates, says the CIBC, predicting it may wait until U.S. growth picks up sometime in 2014.

Source: The Canadian Press

Vancouver is building on its reputation as a city of glass and steel.

Look around the skyline and you’ll see it dotted by cranes, and everywhere there seems to be another hole in the ground making way for another apartment building.

Sixteen condo towers are under construction, according to a database by Skyscraperpage.com and another 67 proposed high-rises are in the works.

Amid newly-tightened mortgage rules and concerns of an over-supply in the Toronto condo market that prompted financial authorities including Bank of Canada governor Mark Carney to sound an alarm this week, we think we’ve earned the right to ask: Is Vancouver oversaturated with condos?

Housing starts in Vancouver are up in the first five months of 2012 compared to the same period last year, driven largely by multiple-unit dwelling construction – which is up by about 50 per cent from last year.

According to the Canada Mortgage and Housing Corporation, 5,503 condo units are under construction in Vancouver in April, adding to the existing 230,000 units already in the city.

B.C. Real Estate Board economist Cameron Muir says the short answer to our question is no.

“Prices have been pretty flat since 2009,” Muir said. “There’s ample supply in the market place, but we are seeing prices at a steady pace.”

The fact more condos than single-detached homes are being built in Greater Vancouver is nothing new, said Muir, as condo starts have consistently made up about 75 per cent of all housing starts in the last several years. “It’s a function of land supply.”

Consumer demand during the last several months is trending on a 10 to 15 year average, he added.

One indicator, says Muir, of the demand-and-supply balance in the marketplace is the sales-to-new-listings ratio.

In Vancouver last month, the ratio, at 15.3 per cent, inched closer to a buyer’s market — but sits within the balanced range of between 15 to 20 per cent.

There hasn’t been a sustained buyer’s market since the recession hit, between late 2008 to early 2009.

As of April, 504 recently-completed units remain unsold. Overall, 3,017 units are listed on MLS.

Is Vancouver over-supplied with condos? The market will let us know.

Here are some of the condos currently under construction in Vancouver:

1. Wall Centre False Creek I, II, III, IV

100 W. 1st Avenue

• 556 units in four towers

• Completion: Early to mid-2014

2. Maynards

1901 Wylie Street

• 253 units

• Completion: Fall 2012

3. James Living

289 W. 2nd Avenue

• 155 units

• Completion: August 2012

4. The Mark

1372 Seymour Street (at Pacific Boulevard)

• 300 units

• At 41 storeys, it is billed as the tallest tower in Yaletown

• Completion: Summer 2013

5. Salt

1308 Hornby Street

• 199 units

• Completion: June 2014

6. Cosmo

161 W. Georgia Street

• 253 units

• Status: Move-in ready

7. The Rolston

1300 Granville Street (site of the old Cecil Hotel)

• 187 units

• Completion: June 2013

8. Maddox

1304 Howe Street

• 214 units

• Completion: December 2013

9. Uptown

2788 Prince Edward

• 100 units

• Completion: Fall 2012

10. TELUS Garden

775 Richards Street

• 428 units in a 53-storey tower, which will be the second-tallest in the city after the Shangri-La

• Completion: 2015

11. Marine Gateway

8400 Cambie Street

• 415 units in two towers

• Completion: 2015

12. 1153 West Georgia Formerly the Ritz Carlton

• 290 units (but should be confirmed independently, based on CBC report)

• Completion: XXX

13. Wall Centre Central Park Boundary Road and Vanness Avenue

1,114 units in three towers

Status: Rezoning application approved. Completion date: XX

TOTAL: 4,464

Here are some proposed developments:

1. Rize Mount Pleasant

Kingsway and Broadway

241 units

Status: Rezoning proposal approved by city council in April. If approved, completion date of XX.

2. Burrard Gateway

1290 Burrard Street (and 1281 Hornby Street)

About 589 units in two towers

Status: Proposed, awaiting rezoning approval. If approved, completion date of 2015 to 2016

Source: GlobalNews. A division of Shaw Media Inc., 2012

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Canada’s housing boom will grind to a halt next year, stopped by price declines in the condominium-saturated markets of Toronto and Vancouver, according to a Reuters poll, raising the risk of a broader economic slowdown.

On a national basis, Canadian house prices are expected to rise 2.0% this year before stalling next year with a negligible 0.5% gain, according to median results of the poll, which was conducted last week.

House prices have increased 37% since their trough in January 2009, The Canadian Real Estate Association index showed. All 15 respondents in the poll said the market was expensive, by varying degrees.

“Home prices are overvalued by slightly under 10% nationwide (and) most of the overvaluation is concentrated in Toronto and Vancouver,” said Mark Hopkins of Moody’s Analytics, citing a common concern about the two hottest urban markets.

House prices in Toronto, Canada’s largest city and financial capital, are expected to rise 6.6% this year after rising almost 10% in 2011. But that will quickly fizzle into a decline of 0.2% next year, the first fall since 2008.

In Vancouver, the country’s most expensive market and until recently clocking the fastest annual price rises, they are expected to fall 1.6% this year and 2.5% in 2013.

Canada’s housing market avoided the U.S. sub-prime boom and bust that triggered the global financial crisis, in large part because its banks are more closely regulated and more conservative, requiring higher deposits for mortgage lending.

While property prices tumbled in the U.S., Ireland, Spain, and to a lesser extent, Britain, record low borrowing costs that followed the recession spurred another wave of home buying and property market speculation in Canada.

By early 2010, sales volumes and prices were rising by double digits on an annual basis. Figures from one industry group showed that since March 2009, the nadir of the financial crisis, Canada home prices have risen by nearly a third.

Source: Cameron French, Reuters

Canadian housing market conditions have cooled slightly, with prices down nearly 2% in the first quarter, but the country continues to outperform other developed nations, according to a new Scotiabank real estate report.

The latest Scotiabank Global Real Estate Trends report released today found that the inflation-adjusted national average home price fell by 1.6% in the first quarter of 2012 compared to the same period of 2011.

That compares with a 1.3 inflation-adjusted year-over-year gain in the fourth quarter of 2011.

Canada’s housing market remains an outperformer among developed nations, but conditions have cooled here as well, according to Scotiabank economist Adrienne Warren.

“Price trends are relatively steady in the majority of local markets, though a few, notably Toronto, continue to report strong appreciation,” Warren writes in the report, released today.

Demand has cooled due to moderate income growth and tighter mortgage insurance rules. In addition, there are more houses up for sale in most parts of the country.

Scotiabank said it expects the number of sales and average prices will be flat in the latter half of 2012.

By comparison, it found global property markets remain under stress, especially in recession-plagued European countries. Ireland saw prices fall a whopping 18.9% and prices in Spain, which has experienced a housing crash, fell 9.1% year-over-year.

Over the weekend, eurozone finance ministers offered to make $100 billion available to Spain to revive banks crushed by bad real estate loans. However, market reaction suggests many observers didn’t feel the relief was enough.

Most countries covered by the Scotiabank report saw prices decline during the quarter.

“The intensifying eurozone debt crisis, increasing financial market strains and moderating global growth suggests there is more downside risk to property prices in the near-term,” Warren said.

“Eventually, however, improved housing affordability and pent-up demand will put many of these markets on a firmer footing.”

Scotiabank projects that the era of ultra-low borrowing costs will continue in most developed economies, while many developing economies are moving to reverse prior hikes.

The latest figures on Canada’s housing market from the Canadian Real Estate Association are due Friday, measuring the strength of sales and prices in May.

In April, the average home price in Canada was up 0.9% from a year ago at $375,810, while sales on a year-over-year basis were 49,480, up 11.5% from 44,370 a year ago, CREA said.

Continued strength in the housing market, largely due to the staying power of low interest rates, has led some economists to warn the market is overvalued. That could make homeowners vulnerable to a downturn, especially those who have used low interest rates to borrow more than they could otherwise afford.

A report released earlier this week by the Toronto-Dominion banking group projected Vancouver and Toronto home prices will probably experience a downturn of about 15% in two to three years, but not the dramatic drop that hit the United States a few years ago.

The Bank of Canada and federal Finance Minister Jim Flaherty recently stepped up their warnings to Canadians to moderate borrowing on real estate, declaring household debt to be the domestic economy’s number one enemy.

Source: Sunny Freeman, The Canadian Press