Canada Home Sales June: Down In 70% of Markets

For the third straight month home sales across Canada have dropped month over month according to the latest report by CREA. While there is a lot in the CREA report that points to an overall cooling in the real estate market there were some bright spots in the report as well.

Seasonally adjusted national home sales activity via the Multiple Listing Service® (MLS®) Systems of Canadian real estate Boards receded 8.2 per cent in June from the previous month. Led by lower activity in Toronto and Calgary, sales declined in almost 70 per cent of local markets. Source. CREA News

First The Bad News…

That’s the bad news and the continued month over month drop in the sales numbers clearly shows a market that is slowing down. Some would argue this should be expected after mortgage rules were tightened in April and this is just a natural phenomenon that is both wanted and expected. There is no doubt that the tightening of mortgage rules pulled forward housing demand and the market is now experiencing a hangover since the rules were put into effect.

A peak at year over year comparison’s are unfavorable: “national sales activity was 19.7 per cent lower in June 2010 compared to last year“. June of last year was a record for sales so this comparison is not completely fair.

Less Housing Supply Coming On The Market

There was some good news in the report that should help to prop up home prices in the short term:

The number of newly listed homes on Canadian MLS® Systems in June 2010 declined by 6.8 per cent from the previous month, following a monthly decline of 4.8 per cent in May. A declining trend in new listings will help maintain the balance between supply and demand, and temper home price volatility. Source. CREA News

It remains to be seen whether a moderate cooling trend in home prices occurs causing a serious correction as was experienced in the US housing market or Canada’s housing market can continue to somehow march forward.

Economic Factors Will Play Out In Real Estate Market

Economic conditions moving forward and in particular oil and commodity prices in addition to the strength of the Canadian dollar will all come into play affecting prices in the real estate market. The moves of Canada’s Central bank as well as trade flows with our big trading partners will also be a factor. If China, the US and Europe are all slowing down how will that affect the markets for commodities and oil?

Year over year home values grew 4.9 per cent in June to $342,662. Looking at the StatsCan website we can see the average after tax income for Canadian family in 2008 was $ 74,600. That means homes cost almost 5 times the average Canadian families annual income. Entering the Canadian real estate market is getting further out of reach for the average Canadian household.

A slowdown in the real estate market has been averted to date by record low interest rates and easy to qualify for mortgages insured with a CMHC (taxpayer) backstop. With only a 5% down payment required and amortization periods of 35 years still available first time buyers are being coerced into a market that further down the road they may not be able to afford.

Prices Always Go Up, Right?

Will prices always go up on Canadian real estate? Can they if interest rates begin to rise as they must at some point? There are no 25 year fixed rate mortgages in Canada.

Are buyers who are taking variable rate mortgages going to be able to afford those mortgages when interest rates are 6% or 7% as they very well could be in the lifetime of that mortgage. Mortgages are full recourse in Canada that means your lender can come after you if you can not pay your mortgage.

No Walking Away From Mortgages In Canada

You can not walk away from your debt as you can in some States in the US like California. What if housing takes a dip of 20%? The last time Canada’s real estate market took a big dip in values it took 13 years for prices to recover the previous peak.

You could be under water with most of your wealth wrapped up in a debt tied to an asset where the value is dropping but the debt remains fixed with associated interest costs. So you can’t sell and the value of the asset is dropping. It pays to watch the sign posts before jumping into any housing market.

As a buyer right now I think the best deals on homes in Canada’s real estate market are ahead of us as of July 2010.

“This is by no stretch a buyer’s market. At best it’s a balanced market in the majority of markets. People are not out there giving their houses away yet.” Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada.

There may be some truth to that comment. With the number of new houses coming on the market dropping home prices should continue to hold in the short term. If economic news worsens watch for more housing supply to come on the market with less buyers to purchase the supply. CREA indicates the nationwide average for housing supply stood at 5.7 months. Watch to see if a price correction down in median home prices follows a rise in this indicator.