Home ownership becoming less affordable as sales, demand fall: Conference Board of Canada

Canadian home prices are still on the rise even as sales fall as demand peters out, one factor

that is making homes less and less affordable, according to a study by the Conference Board of

Canada.

Home sales have fallen by 25 per cent since reaching a peak at the beginning of the year as

fewer buyers compete and more houses come onto the market. That hasn’t stopped houses from

becoming more expensive, a trend that is likely to continue, said conference board associate

director Michael Burt.

“Most of the costs associated with home ownership, such as mortgage costs and insurance, are

outstripping inflation and income growth,” said Mr. Burt, who studies industrial economic trends.

“As a result, housing affordability in Canada, which has been deteriorating over the past decade,

will continue to decline during the next two years.”

Canadian home prices were up 13.6 per cent in June from a year ago, according to the Teranet—

National Bank composite house price index, released Wednesday. Month over month, June

prices were up 1.5 per cent — the largest monthly increase since last August and the 14th

straight monthly increase.

Price increases in June were driven by the bustling housing markets of Vancouver and Toronto,

where many buyers entered the market in advance of the new harmonized sales tax that took

effect July 1 in Ontario and British Columbia.

Recent figures from the real estate brokerage industry show July sales fell 30 per cent and prices

were essentially flat.

As more resale houses come onto the market and fewer buyers compete for homes, the housing

market is at a crossroads between a balanced market and one that favours buyers.

Many economists predict the sector could move further toward a buyers market, which could be

accompanied by a deceleration of price increases, if not outright price drops as seen in the United

States.

Marc Pinsonneault of National Bank (TSX:NA) says home prices could soon fall, especially since

the introduction of the HST in the hot housing markets of B.C. and Ontario have raised the price

of many home purchases

His report on the index — a compilation of average home price changes in six metropolitan areas

— suggests that it may be too early to conclude that vigorous price rises in April, May and June

represent a trend.

“The prospect of harmonized sales taxes coming into effect July 1 in Ontario and B.C. may have

stimulated sales in Vancouver, Toronto and Ottawa in the preceding months,” the report said.

Seasonally-adjusted home sales fell 8.2 per cent in June from the month before and shrunk 19.7

per cent compared to June 2009, according to the Canadian Real Estate Association.

However, the average Canadian home price sat at $342,662 compared to $326,689 in 2009.

Sales activity peaked in December 2009 and hovered near record levels during the first quarter of

this year as buyers rushed into the housing market ahead of changes to mortgage rules, interest

rate hikes and the HST.

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Activity so far this year is up 5.6 per cent compared to the first seven months of last year, but the

gap is expected to shrink as the year progresses because sales ramped up heavily during the

latter part of 2009.

The strong pace of spending at the beginning of the year indicates the Canadian industry has

fully recovered from the recession, and although new home construction activity is expected to

slow, housing starts will remain at a healthy level, the Conference Board said in its report.

Housing starts slowed to 192,800 units in June, the slowest monthly pace this year. And home

building is expected to slow during the second half of the year.

“The slowdown represents a shift to a more sustainable building pace rather than the beginning of

a large correction in demand,” said the Conference Board.

Many economists predict an accompanying deceleration of price increases, with some saying

prices could begin to fall modestly by the end of the year.

While performance in the Canadian housing market is weakening, it is faring much better than the

U.S. market, where the past three months have been the worst on record for new home sales.

Sales of new U.S. homes dropped sharply last month to the slowest pace on records going back

nearly half a century, the latest sign that the economic recovery is fading.

The U.S. Commerce Department said Wednesday that new home sales fell 12.4 per cent in July

from a month earlier to a seasonally adjusted annual sales pace of 276,600.