CMHC: MLS Home Sales Volumes and House Price Gains to Moderate

Submitted by Jasmina on Fri, 2008-06-20 20:11.

Canada Mortgage and Housing Corporation (CMHC) has released their Second Quarter 2008 National Housing Forecast and Market Outlook. Here are Canada & Ontario resale market highlights:

Pace of Canadian home price increases to slow in 2008 and 2009

Despite a slowdown of MLS sales and a general ease on the market, demand remains strong by historical standards. For 2008 and 2009, growth in the MLS average price will remain above inflation. Prices will reach $323,000 (+5.1%) in 2008 and $333,500 (+3.3%) in 2009. Given the strong sellers’ market that prevailed in most regions in recent years, the MLS average price will have doubled between 2000 and 2009 in Canada.

Activity has been intense in the Canadian resale market in recent years

Sharply rising prices and record or near record sales volumes were common occurrences in most parts of Canada in 2007. This strong seller’s market has evolved, however, and has now become more balanced as the number of existing properties displaying “For Sale” signs rises and sales of existing homes levels off. For 2008, the demand will moderate. Existing home sales, as measured by the Multiple Listing Service (MLS), are expected to decrease by 8.5% to 475,900 units. In 2009, the trend will be similar with another decrease to 465,000 units (-2.3 per cent). MLS sales will step back given a moderating demand due to rising mortgage carrying costs.

Ontario resale home prices and new home construction activity

The average MLS price in Ontario will rise by 3.5% in 2008 and 2.4% in 2009. Price growth will be running above inflation in the immediate term thanks to tight resale market conditions. However, a more balanced resale market resulting from lower home sales points to weakening price pressures in the latter half of this year and into 2009.

Ontario new home construction activity will remain above historical averages reaching 72,175 units in 2008 before moderating to 65,000 units in 2009. Slower growth in Ontario’s economy will dampen housing demand in 2009. Slower employment and population growth across the province, rising mortgage carrying costs and a more balanced resale market will temper new home demand as well.

Is housing crisis approaching? Will history repeat itself?

Ontario apartment starts have been capturing a larger share of new construction activity in recent years. This share has more than doubled from 10% to over 20% in the past decade. By the end of 2008, the estimated apartment share will rise to slightly over 33 per cent of total residential construction activity. This has raised questions regarding what factors are driving this dynamic and whether the experience of the late 80s will repeat itself.

Rising prices for low density housing and provincial efforts to intensify and stabilize investment returns in Ontario residential real estate are key factors in explaining rising apartment demand.

But what makes this experience different from activity in the late 80s is the diversity of buyers in the marketplace. Buyers in today’s market would include first time buyers, repeat buyers, investors and empty nesters. A diverse marketplace with prices growing in line with economic fundamentals are factors supporting market stability.

Key factors and trends impacting Canadian housing market

Mortgage Rates

Mortgage rates have moved lower since the start of the year and are expected to remain low through the end of 2009. However, rising house prices will continue to push mortgage carrying costs higher. As a result, this will ease housing demand, particularly for first-time buyers.

Employment

Employment grew at a strong pace in 2007 and a record share of Canadians continue to be employed, moving the economy close to full-employment. Accordingly, job growth should slow to rates that are more in line with increases in the population. Job creation will continue to stimulate housing demand, but not as much as in the previous years.

Income

Incomes will continue grow at a robust pace because of tight labour markets and a strong demand for workers. This will put upward pressure on housing demand.

Net Migration

Net migration is expected to remain strong in 2008. Net inter-provincial migration to British Columbia and Saskatchewan will continue to support demand for both rental and ownership housing in these provinces in 2008.

Natural Population Increase

Canada’s population is aging, and as a result, a smaller proportion of people are in their child bearing years, the birth rate is decreasing, and the rate of increase in the natural population (births - deaths) is slowing. This will eventually lessen the demand for additional housing stock in the longer term.

Consumer Confidence

Consumer confidence, as measured by the Conference Board of Canada, remains positive. Furthermore, strong consumer sentiment is expected to prevail throughout the forecast period. Confident consumers will continue to support demand for home ownership.

Resale Market

Lower existing home sales, combined with a high level of new listings in 2008, will move the resale market towards more balanced demand/supply conditions. As a result, the rate of growth in the average MLS price will moderate during 2008 and 2009.

Vacancy Rates

Modest rental construction and increased competition from the condo market will be offset by strong rental demand due to high immigration and a rising gap between the cost of homeownership and renting. As a result, vacancy rates across Canada’s metropolitan centres should remain relatively stable in 2008.