Housing market fuels concern

Ontario will likely follow major cities in Western Canada into a decline in house prices, and while its slide should be shallower it will be more worrisome due to the province's weaker outlook, an economist says.

The average price of a resale home in Canada fell by 3.6 per cent last month, continuing a decline that started in June when prices lost ground for the first time in more than nine years, according to data released yesterday by the Canadian Real Estate Association (CREA).

So far, the drop in average home values has mainly radiated from Calgary and Edmonton, where July prices fell by 7.8 per cent and 5.3 per cent respectively from the previous year.

It wouldn't be surprising to see prices in these and other large Western cities slump by as much as 20 per cent in the near term in a correction of markets that got ahead of themselves, said Benjamin Tal, senior economist at CIBC World Markets Inc.
"You don't have to be an economist to predict that prices will go down in Saskatoon and Regina, but in terms of the fundamentals all the pieces there are still fine - a healthy economy, energy boom and rising food prices," Mr. Tal said. "Other than people who bought last year thinking prices would keep doubling over breakfast, most people there [Western Canada] should still end up ahead."

Of more concern is Ontario's softening real estate market, he added.

Hit hard by the slump in the auto sector, Windsor-Essex became Ontario's first major market to post year-over-year house price declines. Toronto also appears headed for a drop, with prices rising a scant 1.5 per cent in July, while sales fell by 12.4 per cent and new listings surged by 17.8 per cent.

"The concern here is that the potential decline in Ontario would not reflect overshooting, but instead the further slowing of an economy that is probably already in recession," Mr. Tal said.

"While I would expect a more modest drop in prices of about 5 per cent in Ontario and the GTA, prices have not risen as much here and the decline would be more painful."

July's 3.6-per-cent drop in the average price of a resale home in Canada came on the heels of a 0.4-per-cent drop in June, according to CREA. The average price stood at $327,020 at the end of July, compared with $339,277 in July, 2007.

Listings also remained near record levels in July, with 50,782 properties listed for sale in major markets. It is the second-highest level on record, and down a slight 0.2 per cent from the peak hit in May.

A sharp drop in consumer sentiment helped push sales down 10.9 per cent from the year before, and the latest figures drive home the impact that excess supply is having on prices, Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc., said in a research note.

"While we still doubt that Canada will stage an instant replay of the trauma in U.S. markets, even a mild version would be bad news," Mr. Porter said.

(prepared by Lori McLeod/Globe & Mail)