Western housing market "vulnerable"

The Vancouver housing market is vulnerable to "significant moderation" because recent price increases are not sustainable, according to the co-author of TD Bank's latest national housing market report.

"The recent dramatic price gains in Calgary and Vancouver are unsustainable over the long term, and both cities are vulnerable to significant moderation," bank deputy chief economist Craig Alexander said Thursday.

The report noted it remains a seller's market in Vancouver, even though the demand for housing has softened this year, with sales flat or negative in six of the past seven months. It said the price of an average resale house in Greater Vancouver has passed the $500,000 mark, and home ownership costs have climbed to about 50 per cent of household income.

"The recent trend towards weaker unit sales and rising listings is a positive development that might augur for a soft landing if it continues," the report said. "Close monitoring of this market is clearly called for."

CMHC senior market analyst Cameron Muir said the report's message echoes what he has been saying -- that recent house-price increases and mortgage-rate hikes have combined to reduce affordability, which has dampened sales.

"It would not be a surprise to see house prices fall by a few percentage points a year for a number of years until incomes and affordability grow to pick up demand," he said in an interview. "But we won't see a situation like 1982, when prices fell by 40 per cent, because we don't have the super-high inflation and 20-per-cent mortgages they had back then."

The bank report said housing prices in most parts of Canada never reached the "bubble" stage that they did in U.S. cities, and as such should not go from boom to bust as is happening there.

Canadian housing markets have been booming in recent years with extremely high starts, sales and price gains in many markets, but have generally lacked the degree of speculation that dominated past boom-bust cycles, it said. And the excesses here have been far less than those in the U.S.

"The other major Canadian real estate markets appear to be in much more balanced shape and housing activity in Central and Atlantic Canada has already cooled without prompting a price correction -- supporting the view that a bubble never formed in these regions."

The analysis was released as the Canadian real estate industry was confirming earlier reports of a widespread slowdown in home sales in July, led by declines in B.C., Alberta, and Ontario.

National home sales fell 3.1 per cent in July to 39,319, the Canadian Real Estate Association said. Sales fell in all provinces other than Nova Scotia and Prince Edward Island.

But, it added that the Canadian housing markets were merely returning to more balanced conditions thanks to an increase in homes for sale, which has left the housing market more balanced than it has been in 15 years.

Still, the average price of a Canadian home sold in July was $277,189, 10.6 per cent higher than a year earlier, at record highs for any month in Quebec and Newfoundland, and at record highs for July in all provinces.

While price increases moderated in July, it was the seventh straight month that the average price has been more than 10 per cent higher than a year earlier and all western provinces other than Saskatchewan posted double-digit gains. Alberta led the pack, with prices up 32.5 per cent.

"Prices are expected to continue to rise at a more normal pace over the rest of the year," said real estate association chief economist Gregory Klump, adding that demand for homes remains strong and that the slowdown in the U.S. economy will also help keep interest rates here steady or possibly even lead to lower rates, which is good for housing.

Most analysts agree that interest rates here will not be rising further, a view that was reinforced by news Thursday of weaker-than-expected growth in the Canadian economy during the spring quarter.

The TD Bank noted in its analysis that the housing markets in Victoria, Vancouver, Toronto, and Ottawa were cooling or had already cooled, and were also becoming more balanced in most other cities, other than Calgary and possibly Edmonton.

"Although the Calgary housing market has begun to open up with a substantial increase in new listings in June and July, it remains a seller's market, particularly for new homes," it said.

"Given that the market is overheated at the moment, a bubble may be forming, or could easily develop, but the hope is that the trend towards a more balanced market continues."

Ditto, for Edmonton, it said.

"The strength in the real estate market is supported by economic fundamentals, but prices cannot continue to go up at their recent rate indefinitely," it said. "If the pace doesn't soften, a bubble could form."

(prepared by Eric Beauchesne, CanWest News Service with file from The Vancouver Sun)