NO: SECOND WIND LOOMS

Affordability still strong, debt growth slowing

We keep waiting and waiting, but the great Canadian housing market correction so many investors and commentators consider inevitable has yet to surface. Yes, higher interest rates will put pressure on homeowners. But Canada won’t follow the path of the housing market, which essentially collapsed during the financial crisis.

For one thing, the Bank of Canada has tightened lending standards, and, more importantly, the data don’t point to a correction. The annual 5% increase in average home prices over the past year masks falling prices in markets such as Saint John, Quebec and Victoria, while cities like Toronto, Vancouver and Calgary remain very strong. Yet the multi-dimensional nature of Canadian housing stretches far beyond geography.

Sales have declined at the low-to-mid-price range, most of which has come in the single-detached category. Total sales at this level would have been far worse were it not for more robust activity in the condo market. Benjamin Tal, deputy chief economist at Markets, explains this activity is driven largely by investors and first-time homebuyers who see condo ownership as a cheaper alternative to unaffordable low-rise units. This serves as a good illustration of the important stabilizing force played by condos in recent years — a segment of the market many have cited as a major risk.

Homebuilding trends also continue to surprise on the upside, while household debt accumulation slowed in the second quarter. Mortgage liability growth slowed in to an annual rate of 5.2% — the slowest since the great recession and far below the post-recession high of 8.9% in of “A 30 basis point drop in mortgage rates earlier this year has delivered households an offer they can’t refuse,” Action Economics said in a report. It also noted that cuts to interest rates of that same degree have typically boosted sales by 30% to 40% over a six-month period, suggesting the momentummay continue.

economist Diana Petramala also sees signs of strength, highlighting the surprising lack of listings on the market. Canada’s sales-tolistings ratio moved back to the level reached at the end of when year-over-year prices were growing 8% to 9%. “This suggests that following four months of moderation, home price growth may catch a second wind through the fall months,” she noted. —