Canadian house prices: a regional picture

Judging from the latest statistics, the Canadian housing sector remains fairly solid, particularly when compared with that of the United States, which is mired in a slump. That said, last month, a slight crimp appeared here, too. During June, the average selling price for existing homes fell by 0.4 percent compared to the same month the year before. The big question now is whether that little drop means anything.

At first glance, you'd have to say no. For one, the decline is tiny, especially when measured in conjunction with overall house prices, which have more than doubled in Canada during the past 10 years. Furthermore, the job market, which is a key driver of real estate sector demand, remains relatively solid. According to Statistics Canada's most recent Labour Force Survey, employment remained stable in June for the second consecutive month, and the overall unemployment rate came in at a respectable 6.2 percent.

In addition, interest rates, which for many buyers represent the single largest cost involved in owning a home, also look fairly attractive. Though creeping up slightly, mortgage rates remain extremely low when measured on a historical basis.

Housing sector activity remains strong

To be judged fairly, price data regarding existing homes need to be evaluated in context. For example, the Canadian Real Estate Association, or CREA, recently released data collected via its Multiple Listing Service for the first six full months of the year, and those numbers look far better. During that period, the average selling price of existing homes actually increased by 3.6 percent.

Recently released data regarding new home construction also look strong. Although housing starts slipped slightly in June to a seasonally adjusted annual rate of 217,800 units, according to the Canada Mortgage Housing Corporation, the pace remains near record levels.

Contractors' selling prices for those new homes also continue to rise. In May, new home prices rose by an average of 4.2 percent compared to the same month the year before. And while the rate of those increases has been tailing off in recent months, the increases remain well above the core inflation rate.

In fact, things are going so well that CREA experts, though cautious, expect a positive year for housing prices. "The resale housing market is more balanced that it was last year in all major urban centres," says Gregory Klump, the association's chief economist. "The frenzied pace for sales activity has faded, with buyers now better able to shop around before making an offer. Price increases are expected to be modest in the second half of 2008, as sales continue easing and listings remain high."

New listings remain high

So, if many housing sector indicators continue to look relatively strong, how could the average selling price of existing homes have fallen last month? Well for one, the amount of new listings is also very high. According to CREA, 332,958 units were put up for sale during the first half of the year, up 8.1 percent compared to the same period the year before. And when there are more homes to choose from, shoppers can haggle to get a better deal.

However, even more importantly, much of the decline in average house prices is simply a reflection of previous surges that occurred in the Calgary and Edmonton areas. For example, during 2006 and 2007, the average selling price of existing homes sold in Alberta rose by a mind boggling 30.8 percent and 24.8 percent respectively.

The trouble is that those kinds of performances are hard to top. In essence, prices there were thus destined to cool off. When they did, they brought the rest of the Canadian averages down with them. The irony is that this all occurred at the same time that average selling prices hit record highs in close to a dozen other markets across the country, including Ottawa, Montreal, Saskatoon, Saint John and Kitchener-Waterloo.

Of course, all of this is not to say that house prices on a national basis will not decline further. In fact, many observers have already said that housing demand growth will taper off for this year as a whole. However, compared to the increases that we have seen in recent years, there are few signs that any impending correction would be more than a minor affair.

By: Peter Diekmeyer - economics columnist