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Housing sector defies doomsayers

The country's residential real estate sector continues to rack up solid numbers, with the average price of an existing homes sold via the Canadian Real Estate Association's Multiple Listing up 8.4 per cent to $382,373 in July, on a non-seasonally adjusted basis.

Homebuilders were also busy. According to the Canada Mortgage and Housing Corporation, housing starts hit a seasonally adjusted annual average pace of 192,853 units in July, roughly unchanged compared to June. On a six-month moving average basis, starts trended up slightly to 187,416 units during the month, compared to 182,142 the previous month. Both numbers are well in excess of the 175,000 new homes that need to be constructed each year in order to keep pace with demand from immigration and new entrants into the workforce.

2014 looks good
While CMHC also issued a forecast earlier this month that housing starts for full-year 2013 would be slightly weaker than in 2012, the decline is expected to be mostly due to weakness during the first six months. During 2014, starts are expected to rise slightly with a stronger job market, economic growth and increasing net migration.

The strong data provide good news to sector stakeholders. The hope is that Canadian housing prices, which many believe are well into overvalued territory, will make a soft landing, avoiding the outright crashes that hit many other national markets in recent years, such as the United States, Japan, Spain and Ireland.

Dark clouds on the horizon
Canadian residential real estate prices have doubled during the past decade, according to the Teranet National Bank Composite House Price Index. However, analysts like to point out many dark clouds on the horizon. Affordability is creeping up, with average prices high relative to rents and incomes. And, while Canadians have been saving more, many remain financially strapped, particularly younger couples.

"Households have dramatically pared back their debt accumulation and repayments of mortgage principle have increased," notes Leslie Preston an economist with TD Economics. "Despite this shift, Canadians remain highly-leveraged, and it will take quite some time for measures on leverage to return to historical norms."

One reason for the tension relates to mortgage rates, which have jumped by more than 30 per cent in the past half year. For example, TD Bank's posted five-year closed rate is now 5.14 per cent and its special rate is a 3.79 per cent.

Another potential headache relates to demand for Canadian raw materials exports to emerging markets, which have been a major economic growth driver in recent years. A good advanced indicator of demand is the value of the Canadian dollar, which has been falling lately. This suggests that markets believe that write-downs in projected growth in China, one of Canada's largest customers, are real, could persist and even possibly spread to other countries.

How serious these warning signs are is anyone's guess. All we can say right now is that while Canada's housing sector may be surfing in overvalued territory, so far it looks like the anticipated landing will be soft.

Peter Diekmeyer is Bankrate.ca's economics expert. He can be reached at peter@peterdiekmeyer.com

-- Posted September 4, 2013
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