Canada's housing market boomed in July as low interest rates and improving economic confidence sent sales of existing homes to a record for the month, despite generally weak economic conditions.
The remarkable turnaround from an almost frozen market at the start of the year has economists stunned, and while they predict activity will level out soon, the risk is continued low interest rates begin to stoke a house price bubble.
"We can't rule it out," Douglas Porter, the deputy chief economist at BMO Capital Markets, said of the possibility of a bubble. But he said the scenario was hard to fathom given the underlying weakness in the economy.
Even so, that weakness to date has not prevented a strong rebound in the existing housing market, which declined steadily throughout 2008 and hit a decade low in January.
Home resales increased by 18.2% in July compared with a year earlier, to reach 50,270 units -- the highest July sales result on record, Canadian Real Estate Association figures showed yesterday. At this pace, the housing market is on track to be even hotter than it was in 2007, which was a record year. Seasonally adjusted sales have risen for six straight months to be up 61.2% since January and are now just 1.4% below the peak in May 2007.
But despite the spectacular gain, the level of activity in the first seven months of this year remains 6% lower than in 2008 when activity had already begun to decline. Mr. Porter said some of the rise in the month was a result of sales that had been held back from the start of the year because of the weak market conditions.
But homebuyers have swarmed back into the market because of low interest rates and more affordable house prices.
"Homebuyers recognize that interest rates and prices have bottomed out, and are taking advantage of excellent affordability before prices and interest rates move higher," said Dale Ripplinger, the president of CREA.
A five-year fixed-rate mortgage, the most popular product among consumers, is still available for under 4% at some financial institutions. Variable-rate mortgages, tied to prime, remain in the 3% range and are not expected to rise until June. The Bank of Canada has promised to keep the benchmark interest rate at a record low 0.25% until mid-2010, provided inflation does not begin to rise.
The strength in the market has been felt right across the country. Vancouver sales last were up 90% from a year ago, while sales climbed 28% in Toronto and 28% in Edmonton. The strong demand in the country's highest-priced markets has to some degree skewed the average price higher. The average price of a home sold on the Multiple Listing Service last month rose 7.6% from a year earlier to $326,832.
The strength in the resales market has not been echoed in the price of new homes, which fell 3.3% in June compared with a year earlier, Statistics Canada figures showed Wednesday.
Part of the pressure on prices has come from a decline in supply, which has fallen for seven straight months. New listings in July were down 13% from a year earlier to 73,444.
Economists are skeptical the housing market will be able to continue to post such strong growth.
"After improving markedly, affordability will deteriorate in coming quarters, and unemployment will continue to rise," said Pascal Gauthier, an economist at TD Bank Financial Group. "New listings might well start rising again too. Combined, a larger supply and a softening in demand should cool prices in a delayed fashion."
Jeff Goethals, AMP
Accredited Mortgage Professional