Housing Prices to continue climbing, CMHC says

Michael Babad, The Globe and Mail


Housing starts to sink

Canada’s cooling real estate market is taking its toll on home building, and the increase in home values.

Canada Housing and Mortgage Corp. said today it expects housing starts to sink in the early part of this year, before picking up later in 2013 and moving “slightly higher” next year.

Residential construction starts are expected to come in between 178,600 and 202,000 this year, and 171,200 to 217,000 in 2014.

It projected sales of existing homes between 418,200 and 484,000 this year, and 439,600 next.
Where prices are concerned, the national agency expects an average $356,500 to $378,500 this year, and $363,800 and $390,800 in 2014.

Based on the “point forecast,” that would be a gain of 1 per cent this year and 2.7 per cent next year.
“CMHC expects housing construction activity will trend lower in the first half of 2013, before gaining more momentum by the end of the year as economic and employment growth remain supportive of the Canadian housing market,” said Mathieu Laberge, CMHC's deputy chief economist.

“In 2014, improving economic conditions may be partially offset by a slight moderation in the number of first-time homebuyers, and potential small and steady increases in mortgage interest rates.”

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If Canadian Homes are overpriced by 10%, what happens next?

IMF on housing

The International Monetary Fund has added its calculations to those of others who have been measuring the over-valuation in Canada’s housing market, coming to the conclusion that the level is about 10 per cent.

The question then becomes: What happens next? According to the IMF and others, possibly not much.

As The Globe and Mail’s Barrie McKenna reports, the IMF warned late yesterday to expect an “adjustment” in the residential real estate market, given the Washington-based group’s estimate that homes are overpriced by an average 10 per cent in Canada.

That’s based on studying rental rates and household income, an analysis that’s used by others, as well.

But Roberto Cardarelli, the group’s mission chief for Canada, believes, as do others, that the scenario is one of a “soft landing."

The country could, he said, absorb a price drop of 10 per cent over five years providing the economy doesn’t stall and the labour market continues to grow.

The real estate market has been slowing since Finance Minister Jim Flaherty moved to cool things off with his latest round of mortgage restrictions last summer.

But based on early reports from some local real estate boards, January wasn’t as bad, and bolsters the soft-landing view.

As The Globe and Mail's Tara Perkins reports today, home sales in Canada inched up 1.3 per cent in January from December, though were down about 5 per cent from a year earlier. The MLS home price index was up just 3.1 per cent, marking the slowest increase since the spring of 2011.

The pause in the market isn’t particularly unusual given Mr. Flaherty’s rules changes, the latest in a series.

Since peaking in June, BMO Nesbitt Burns notes, the MLS home price index has declined by about 1.5 per cent. But, says BMO’s Robert Kavcic, its previous, steady climb was not “without interruption,” having been bumped around by previous restrictions in the morning market.

“In each case, underlying fundamentals like a falling jobless rate and low mortgage rates ultimately saved the day, and there’s little to suggest that those fundamentals won’t be in pace this time around, as well,” the economist said.

“It also stands to reason that a one-time change to mortgage rules (lower amortization period, for example) would cause a one-time level shift in prices, after which time underlying fundamentals (income, joblessness, mortgage rates, etc.) take over in setting the path.”

Mr. Kavcic has found that the average time of “adjustment” to the previous rule changes – there were three before those in the summer – was in the area of seven months. And, he pointed out, the market is now seven months on from Mr. Flaherty’s latest move, though it was tougher than those of the past.
“The spring selling season
 will be a telling one, and with sub-3 per cent five-year fixed rates, don’t be shocked if prices find a floor again.”