Canada's hot housing market now cooling off

The once red-hot housing market — which several observers warned last month was in danger of turning into a bubble — is showing signs of losing steam as new listings climb and affordability begins to tighten, data released Monday indicate.

Concern that real estate prices were entering dangerous territory — spurred by record-low interest rates — prompted the federal government to introduce new rules last month governing mortgage eligibility, intended to target "reckless" speculators. The rules are set to kick in April 19, but it appeared a cool-down in real estate activity has already begun, data from the Canadian Real Estate Association suggested.

Sales of existing homes declined for a second straight month, with a 1.5 per cent month-over-month drop in February on a seasonally adjusted basis. This followed a 3.8 per cent decrease recorded in January. A heavy drop in British Columbia, which coincided with the Winter Olympics in Vancouver and Whistler, was partly offset by a robust activity in Toronto.

Meanwhile, the number of new listings — an indication that homeowners are looking to capitalize on demand — climbed 2.4 per cent, marking the fifth straight month that housing supply grew. The amount of housing inventory in February stood at 5.2 months, well below where it was a year ago, at 8.8 months, but on par with 2008 levels.

"Headline price increases are drawing new supply to the market, and so that's taking some steam out of the market," said Gregory Klump, CREA's chief economist.

The average price of all homes sold in February through the MLS system was $335,655, CREA said, up a robust 18.2 per cent from a year ago.

However, CREA said the gain was smaller than in the past four months — down from the January increase of 19.6 per cent — and future increases are expected to become "further subdued" in the months ahead.

"Time will tell how normal the market becomes, but I think there are pretty clear signs that some self-correcting mechanisms are starting to take over and lead to a calmer market, compared to what we saw in late 2009," said Douglas Porter, deputy chief economist at BMO Capital Markets.

January and February are generally not considered great months in the real estate industry, as potential buyers put off house shopping until the weather improves. Still, Porter said each month's data are crucial, and he recalled that weak sales in the early winter of 2008 foreshadowed a downturn in real estate that year.

There was an expectation housing sales would continue their brisk pace this year as buyers look to move before the Bank of Canada raises rates, and Ontario and British Columbia introduce a harmonized sales tax in July. The new federal rules, announced four weeks ago, were also expected to add to momentum.

Meanwhile, economists at Royal Bank of Canada on Monday released their latest housing-affordability index, and suggested it became slightly tougher for Canadians to own a home in the final months of 2009.

Affordability did not "come off the rails" in the fourth quarter as had been feared, said Robert Hogue, senior economist with Royal Bank. "Nonetheless, (it) has become abundantly clear that affordability is once again set on an eroding path."

This is especially the case in Toronto, where the average home price is up 19.4 per cent on year-ago levels, and British Columbia, led by Vancouver's 22 per cent year-ago appreciation in prices.

Affordability has improved for average household since mid-2008, and Hogue said the "significant" fall in mortgage rates accounted for the bulk of that trend. The average rate on a five-year mortgage recently peaked in January 2008 at 6.81 per cent, and fell to 4.83 per cent this past December, Bank of Canada data indicate.

"The eventual reversal of such abnormally low mortgage rates, thus, will put some stress on affordability levels," Hogue said. "The extent of the deterioration will depend on the speed at which rates will rise."

(prepared by Paul Vieira/Financial Post/Vancouver Sun)

• Housing resales in February (% change m/m y/y):

Canada 1.5 44
British Columbia -13.3 63.0
Alberta 1.6 26.3
Saskatchewan 1.3 14.8
Manitoba 0.5 10.4
Ontario 3.3 55.0
Quebec -1.0 37.7
New Brunswick -12.5 9.9
Nova Scotia -2.7 10.8
Prince Edward Island -3.3 -15.6
Newfoundland -6.3 18.8


Source: Canadian Real Estate Association