Canadian home sales drop in July; average home prices likely to rise strongly in 2016

Canada’s housing market seems to be losing momentum. Resale activity in the country dropped 1.3 percent on sequential basis and 2.9 percent on year-on-year basis in July. This was the largest annual drop since 2013, stated CREA. Meanwhile, listings were up 1.2 percent, assisting in bringing the market nearer to the balance in the month, resulting in a mild slow down in home price growth.

The average home price rose a solid 9 percent year-on-year, marking a modest slowdown from a 12 percent year-on-year rise in June. On a quality adjusted basis, prices rose 14.3 percent, with condo prices rising 11 percent.

Region wise, the largest fall in home sales was witnessed in Vancouver, where sales dropped 18 percent year-on-year and nearly 28 percent from the peak reached in February 2016.

Meanwhile, sales were moderate in major markets such as Victoria, Toronto, Montreal, Calgary and Edmonton. Markets in B.C. and Ontario remain tight and continue to drive most of the price pressures. The average home price in Toronto rose 16.3 percent year-on-year, while in Vancouver it rose 16.5 percent in July. Excluding B.C. and Ontario, home prices fell 0.2 percent year-on-year.

The macro back drop for housing continues to be quite favorable with Canada’s interest rates heading lower in 2016, said TD Economics in a research report. Continued pent-up demand and low interest rates should assist in lifting housing markets throughout the board and help counter increasing unemployment in markets that rely on commodity.

“While we think an elevated unemployment rate will keep housing activity depressed in Calgary, Edmonton, Regina and Saskatoon, the peak-to-trough decline in home prices in these markets is likely to be more modest than originally anticipated, added TD Economics.

Vancouver is an exception. Even if the drop in sales activity in 2016 might partially suggest a lack of supply, the new 15 percent land transfer tax on foreign buyers is expected to strengthen the downturn. Residential sales are assumed to fall a further 14 percent to 20 percent because of tax. Overall, home prices are likely to decline by nearly 10 percent between now and the end of 2017, noted TD Economics.

Average home prices are likely to increase at a double-digit rate in 2016. Moderately rising interest rates and new capital requirements for big banks might raise the cost of borrowing and take some steam out of housing activity in 2017, according to TD Economics.