Strong fundamentals fuel housing demand heading into 2012

11/25/2011 by John Clinkard

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It appears that, to date, the effects of the steady erosion of consumer confidence since May and the increasing concerns about the potential impact of the European sovereign debt crisis on global financial markets have not pulled the rug out from under Canada’s housing market.

This observation is based on the healthy month-over-month increases in existing home sales and the concomitant stronger than expected pattern of housing starts in September and October.

Moreover, it suggests that the impact of historically low interest rates, strong growth of full-time employment through September and the effects of an increase in foreign investment in real estate is continuing to underpin housing demand heading into the new year.

Barring a major collapse of investor and/or consumer confidence triggered by rapid escalation of the European sovereign debt crisis, housing demand should continue to expand over the next few months despite the sharp drop in full-time employment in October for four specific reasons.

First, the Bank of Canada will probably keep interest rates low at least until mid-2012 on account of persisting uncertainty about the health of the global economy in general, and the U.S. economy in particular.

Second, although full-time employment retreated sharply in October, over the past 12 months Canada has added 226,400 full-time jobs. This job gain together with a relatively low unemployment rate, should help to underpin housing demand in the near term.

Third, while prices of existing homes were, according to the Teranet/National Bank House Price Index, up by 5.4% year over year in August, the average price of a new home in Canada, based on the Statistics Canada New House Price Index, was up a relatively modest 2.3% year over year in September.

Finally, foreigners should continue to invest in Canadian real estate given Canada’s relative appeal as an investment destination due to its relatively strong currency vis-à-vis the US$, its strong fiscal health vis-à-vis the other G7 currencies and the fact that it is considered by a number of independent sources, including Forbes, to be an excellent place to do business.

Looking further ahead, while the overall fundamentals of Canada’s housing market appear quite solid, an increase in the months of inventory of existing homes for sale and a moderate deterioration in home affordability, due to higher house prices in a number of provinces, suggest that housing demand will moderate over the course of 2012.

Based on this prospect we project that housing starts will total 185,000 units in both 2012 and 2013 following an estimated 190,000 in 2011.

Housing starts and existing house sales in Canada
Housing starts and existing house sales in Canada
Data Sources: CMHC, Canadian Real Estate Assn/Chart: Reed Construction Data, CanaData.

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