03/15/2013 05:27 EDT

Canada Housing Bust Sees Sales Tumble; So Why Are Prices Still So High? [UPDATED]


Home sales fell a whopping 15.8 per cent year-over-year in February, according to the latest numbers from the Canadian Real Estate Association (CREA). It's more evidence that the slump over the past half year persists, but prices in many markets are still rising.

The national average price fell one per cent to $368,895 in February, but removing Vancouver's sluggish market from the mix, prices actually rose 1.3 per cent year-over-year, CREA said Friday. Using its home price index measure, CREA says prices actually rose 2.7 per cent in February from the year before.

Slowing sales may come as a relief to some buyers waiting for the market to tip in their favour, but could also discourage potential sellers from listing their homes. The number of newly listed homes fell 1.2 per cent last month from January to their lowest level since November 2010.

This tug of war between buyers and sellers causes what economists call "sticky" prices, which means those sky high prices could leave home ownership out of reach for some Canadians unless sellers start to cave on prices.

“There’s a standoff between buyers and sellers,” said John Andrew, director of the executive seminars on corporate and investment real estate at Queen’s University.

Buyers get the sense that it is better to wait until the sales slowdown and a long-expected increase in interest rates translate into less competition and lower prices. Sellers, meanwhile, have grown accustomed to prices rising for more than a decade and believe they can still fetch more than the asking price if they wait out a slump. Both are inclined to sit on the sidelines, putting little pressure on prices.

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The national average home price sits at around $354,754, which is good news for Canadian homeowners, as high home values boost household wealth.

But those sky high prices have also been implicated in record levels of household debt, as Canadians have taken advantage of bargain interest rates to buy houses they might not otherwise have been able to afford.

Sales have been in a downward spiral since last summer, when Finance Minister Jim Flaherty introduced his third crackdown on mortgage rules in as many years.

Toronto’s real estate board recorded a 15 per cent drop in sales, yet the average selling price hovered at $510,580 – up two per cent from February, 2012. Montreal sales were down 22 per cent year-over-year, while prices seemed to remain little changed. In Vancouver, one of the first markets to feel the whiplash from overheated sales, sales fell 29 per cent year-over-year, but prices fell only 3.3 per cent, to $590,400 on average.

But this does not mean prices are going to stay at these levels. Pricing tends to trail sales by a few quarters as sellers try to hold out for a bit before resorting to a lower asking price.

The market has remained in balance so far because sellers who do not need to unload their houses are pulling their listings and some of those planning on listing are holding out, so inventory falls along with sales, said analyst Ben Rabidoux of M. Hanson Advisors.

“But if there isn’t an uptick in sales again in the near term, then what you find is the people who have to sell become the new price setters,” he said.

“When you see sales falling off, there’s often a lag of as much as a year before you really start seeing prices getting hit as well.”

The market still sits in balanced territory with the national sales-to-new-listing ratio at 50.3 per cent, a reading that has held steady for six months.

But a piece of the data puzzle is missing – the number of active listings, which the Canadian Real Estate Association does not make public, but which would help paint a clearer picture of the supply and demand, said Will Dunning, chief economist at the Canadian Association of Accredited Mortgage Professionals.

(UPDATE: CREA chief economist Gregory Klump says that, even though the association doesn't release active listings numbers, it does release an estimate of months of inventory, from which it is possible to "solve for the number of active listings.")

“What I would suspect is that active listings are actually building across the country ... so when that hits a certain threshold, then we’ll start to see prices sliding,” Dunning said.

‘We’re still seeing listings flow into the market at the same rate as in the past, but because of lower sales, they’re coming out of the market more slowly, and so I would think there’s more inventory remaining on the market.”

That would tip the balance squarely toward a buyers’ market that would put home shoppers in the driver’s seat and induce sellers to rethink their strategies, Dunning said.

Rabidoux said Vancouver’s market is a perfect example of what could be coming in the rest of Canada, especially sectors where supply is beginning to outpace demand, such as in Ottawa and Montreal and in Toronto’s condo market. In Vancouver, it became clear in the early part of last year that the market was rolling over from hot to cold, but that change wasn’t reflected in prices until the latter half of 2012.

Andrew said Canadians would be lucky to have Vancouver’s scenario play out across the country because, although prices are dropping, it has been a gradual decline rather than a dramatic bursting of a bubble.

“I think that will continue for some time. I think that’s probably what’s going to happen (in other cities). If there’s a model for what we’re likely to see in a lot of other markets in Canada, it is Vancouver.”

Most economists are on the same page about the direction of housing sales in Canada’s near future – down. Calls are much more varied, however, on house prices, which are more difficult to predict because they rely on consumer psychology and subjective views about what buyers are willing to pay.

Rabidoux expects outright price declines rather than simply the moderation in growth that TD Bank predicted earlier this month. That could cause a big decline in economic growth because most of the household debt in Canada is tied to housing, either through mortgages or home equity lines of credit, and low interest rates have made it easy to mask just how many Canadians might be struggling when rates rise.

“There’s a great quote from Warren Buffet, who likes to say: ‘You never really know who’s swimming naked until the tide goes out,’ “ he said.

“It’s the same thing with borrowers: You never know who’s actually stretched until they can no longer access cheap debt to keep making their payments.”