Worst of housing prices decline behind us, say economists

The worst is over for North America's beleaguered housing markets, with a steady stream of data out of Canada and the U.S. indicating the recovery is at hand, economists say.

"A similar pattern in both countries is unmistakenly suggesting we've not only bottomed in housing, but we're on the way back up," said TD Bank chief economist Don Drummond.

Canada's already brightening picture was helped along Wednesday by a report showing housing prices in major markets across the country jumped 1.5 per cent in June, building on May's two per cent advance.

The rebound in prices was evident even in most of Canada's hardest hit urban markets, like Toronto and Vancouver, the Teranet-National Bank report showed.

For National Bank senior economist Marc Pinsonneault, that means "the worst of home-price deflation in Canada is behind us," he said Wednesday.

"The improvement is consistent with the huge improvement in market conditions in most of the major cities in Canada," which show sales resales rising sharply — up 18 per cent in July alone — and listings on the decline, Pinsonneault said.

The numbers out of the U.S. are also good, at least relative to bone-jarring declines that marked the subprime meltdown and drove housing prices 31 per cent below their peak in 2006, Drummond said.

On Tuesday, the S&P/Case-Shiller composite index showed home prices in the U.S. also bouncing higher, for the second straight month.

And on Wednesday, the U.S. Commerce Department announced new-homes sales surpassed expectations by increasing 9.6 per cent to 433,000 units in July, the biggest increase in more than four years and the highest level of activity in 10 months.

"The housing market has clearly turned the corner," BMO Capital Markets economist Jennifer Lee said in an interview.

"The items supporting a housing recovery have been working in tandem over the past while, and they are still going strong, like the Energizer bunny."

She credited rapidly declining inventories of unsold homes and the $8,000 U.S. first-time homebuyer tax credit, along with the same things that have helped the Canadian market, like low housing prices, improving consumer confidence and inexpensive mortgages, for the recovery.

Though residential real estate accounts for only five per cent of each country's economies, Drummond said rising home prices boost household wealth and spending power, and carry a psychological boost to a recession-weary consumers beyond their numbers.

Renewed strength in the Canadian market was evident in four of six major markets tracked by the Teranet-National Bank survey. Vancouver posted its first price gain after 11 months of declines, up 1.6 per cent; Montreal posted its fourth straight monthly increase, up 1.2 per cent; Ottawa gained 2.1 per cent; and Toronto recorded its second straight month of gains, up 2.3 per cent.

Halifax and Calgary were the only laggards, each slipping 0.2 per cent. For Calgary, it was the 12th consecutive losing month.

Economists were quick to point out that while the trend has shifted, markets on both sides of the border are way off previous peaks. In the U.S., for instance, about 600,000 new homes are being built annually, compared with the 2.3 million homes at the peak of the cycle.

Current conditions in Canada have created a seller's market, said Pinsonneault, although he expects greater balance to return as higher prices draw more properties onto the market.

Mortgage rates, meanwhile, won't rise over the next 12 month by more than 50 to 75 basis points from today's 5.85 per cent posted rate on fixed five-year mortgages, he said.

One uncertainty is whether the Bank of Canada can hold lending rates steady, as promised, until the middle of next year, economists say.

(prepared by John Morrissy/Financial Post)