Canadian housing activity settles into a still hot pace

Following a sharp run-up in home sales during the spring months, Canadian housing activity appears to have stabilized at elevated levels.  While existing home sales only rose a modest 0.3% m/m in August, it was the third best August on record coming in behind 2006 and 2007, both of which were record years for housing demand. On a seasonally-adjusted basis, existing home sales remained almost 10% above their long-run average.

The market dipped further into balance in August, with listings (+0.5% m/m) rising at a faster pace than sales. The sales-to-new listings ratio dipped to 55.72 in August and has been gradually trending lower since peaking at 56.52 in June. A ratio between 40 and 60 indicates a balanced market.

Despite overall balanced market conditions, home price growth remains hot. The average home sold for $433,367 in August, up 8.7% year-over-year. Average annual existing home price gains have moderated since peaking at 9.6% in May of this year. However, the moderation is likely due to a shift in sales from single-family homes into condos.

Price growth in the quality adjusted home price index accelerated to 6.4% y/y in August, up from a 5.0% pace at the start of the year.  Single-family detached homes (+8.9%) continue to boost overall price gains while condo prices are rising at a far more modest 3.1%.

From a regional perspective, markets can be divided into three camps. There are those that are hot, including Toronto and Vancouver where market conditions are tight (indicated by a sales-to-listings ratio of above 60) and overall home prices are growing at a roughly 10% year-over-year. Even the condo market is starting to see greater price pressures in both markets, with apartment prices rising 4.7% y/ in Toronto and 6.3% in Vancouver. Most markets across B.C. and Ontario would fit into this camp.There are the markets that are balanced and activity is humming along at a healthy moderate pace, including Ottawa and markets in Quebec where sales are up 4.1% and 5.8% year-to-date, respectively. And then there are markets in commodity driven provinces that have weakened considerably this year, including Calgary, Edmonton, Regina and Saskatoon, where both sales and prices are down year-to-date. Following a modest recovery over the spring and summer months, the Calgary home market weakened considerably again in August, with sales down 28% year-to-date.

The housing market has outperformed general economic conditions through the first half of the year.  With the economy in a technical recession, housing activity and new home construction continued to top long-run averages. While most of the strength in Canada's hottest housing markets can be attributed to the drop in interest rates at the start of the year, it has generally been viewed as unsustainable. And, momentum from lower interest rates is starting to fade - particularly in markets whose fortunes are heavily tied to commodity prices.

"Overall, We continue to expect a few more month of above average activity, but then the lagged effects of weaker economic conditions are likely to catch up to housing activity in the fall months. In particular, we believe that the correction in Calgary and Edmonton has not run its course and prices could come under further pressure through the end of 2015 and into 2016", says TD Economics.

The surge in market activity through the first half of 2015 has helped to absorb some of the abundant supply of condos on the market in both Ontario and British Columbia. As such, while annual price growth is expected to moderate to a more sustainable 3% to 4% pace next year, as more balanced market conditions and healthier economies help avoid a deeper slowdown in home sales and prices.