BUSINESS

Canadian home resales drop in June in what could be a cooling market

07/16/2012 10:44 EDT | Updated 09/15/2012 05:12 EDT
Canada's real estate market is showing signs of cooling off with national home sales and the average home price down year over year, indicators that have at least one senior economist wondering if the once red hot market is entering a "Big Sleep."

The new data from the Canadian Real Estate Association follows several reports saying some real estate markets and some types of housing are overvalued, although there's a range of opinions about how much and how quickly prices will decline.

That's left economists and consumers watching closely for signs that demand has softened to the point where prices will start going down.

On Monday, the CREA reported the number of previously owned homes sold last month dropped 4.4 per cent from June 2011, the first annual decline since April 2011.

Resales of homes were also down 1.3 per cent in June from May — the second month-to-month decline — with a total of 46,444 transactions through CREA members. That was down from 48,591 in June 2011, the association said.

"It's showing early signs that the market is softening but it's still running pretty strong," said Gregory Klump, CREA's chief economist.

The numbers also suggest the market was softening before Finance Minister Jim Flaherty announced new mortgage rules on June 21 — a move the minister said was necessary because of the risk, among other things, of a housing bubble.

Klump said the latest restrictions on mortgages, which took effect on July 9, are expected to affect first-time buyers the most, but the overall changes to the real estate market won't be immediately known.

"One or two cars does not make a parade, so it will be the fall before we have a better understanding of how the most recent changes are going to impact the market," Klump said from Ottawa.

The national average home price in June was $369,339, down 0.8 per cent from the same month last year, CREA said. But prices increased in Calgary, remained strong in Toronto and continued to slow in Vancouver.

However, CREA said its MLS Home Price Index — which the association says is a better measure because it adjusts for different types of properties sold — increased 5.1 per cent between May and June 2012.

BMO deputy chief economist Douglas Porter questioned whether the lower home sales in June could be the "start of the Big Sleep."

"Even before the new mortgage rules kicked in, all signs suggest that the Canadian housing market was already cooling — the new rules will simply pull hard on a closing door," Porter said in a research note.

Porter noted that despite the drop in prices, about 70 per cent of Canada's cities were still reporting price increases.

RBC senior economist Robert Hogue said the latest "tweaks" in mortgage rules will see slower sales in the coming months.

"Next year, we're expecting interest rates to start rising in the first quarter and those, in our view, will put almost a cap on the market," Hogue said from Toronto.

"We may see some very modest declines in sales year-over-year next year."

But Klump said he's optimistic about home sales, given the right conditions.

"So if we continue to grow as an economy, if we continue to add employment and interest rates remain low and it may take a little bit of time, but it may well be that in time sales will begin to pick up from that lower level that is anticipated beginning in July."

RBC's Hogue said the Alberta housing market will be one of the strongest in 2013.

"We're very bullish on the economy of Alberta."

The real estate association, which represents real-estate boards and associations that handle most of the country's property transactions through the MLS system, said the decline in sales activity and an increase in new listings resulted in a "more balanced" national housing market in June.

The number of newly listed homes rose 1.4 per cent in June compared to May, led by the Toronto market. Some 42 local markets, out of 100 markets across the country, registered a monthly increase in new listings of at least one per cent, the association said.

In the first half of 2012, a total of 257,193 homes traded hands over Canadian MLS Systems, up 4.7 per cent from the same period in 2011, the real estate association said.

Under the new mortgage rules, borrowers will be allowed to use up to 80 per cent of their property's value as collateral for home-equity loans, down from 85 per cent.

In addition, the maximum amortization period dropped to 25 years from 30 years for government insured mortgages.

Flaherty also said government-backed mortgage insurance will be limited to homes with a purchase price of less than $1 million.