Mariod Lefebvre
Director
Centre for Municipal Studies

But we’re not the U.S. The house price bubble in the United States came about due to elements that have less to do with economic fundamentals than with US-specific laws, like mortgage deductibility for tax purposes and the ring-fencing of mortgage debt, such that the lender can’t pursue the other assets of a mortgagee. If anything, Canada will see a pause in home price growth with possible marginal declines in a few markets, but nothing near what the United States has been through.

Let’s take a closer look at Canada’s housing market, starting with the resale housing market. According to the Conference Board’s Metro Resale Index, a monthly publication discussing the latest trends in the existing home market, the recent numbers are not good. On a month-to-month basis, sales were down in 26 of Canada’s 28 largest urban centres in July and in 18 of 26 in June. On a year-over-year basis, sales were down in all 28 markets in July, with declines ranging from 3.5 per cent in Trois-Rivières to 48.5 per cent in Fraser Valley (which includes Abbottsford). The annual decline in existing home sales has been particularly large in Ontario and Western Canada and less pronounced in Québec and Eastern Canada.

It is worth noting, however, that despite these large declines in sales, existing home prices have continued to grow across the land. They have grown not only on a year-over-year basis, where price growth was positive in all 28 markets in July, but also month-to-month. Specifically, prices continued to grow in 19 of 28 markets in July from June. This is because, while sales did decline significantly, they are coming off incredibly high levels in most markets—levels that were simply not sustainable.

Let’s put things in perspective: the Canadian housing market has generally been booming for about a decade now (except for the slowdown during the recession) and The Conference Board of Canada has long claimed that at one point in time, the market would have to come back to more normal levels of activity. This is what’s happening right now. It has to be stressed that 24 of 28 markets are currently showing a balanced stance in their existing home markets, a sign that the recent large declines in sales have more to do with a return to more normal levels of activity than the start of a steep downturn.

With the pace of resale housing activity slowing down, expect housing starts to follow suit. However, for now, as indicated in the Conference Board’s Metropolitan Housing Starts, a monthly publication covering the new housing market in Canada, the latest data were still relatively upbeat for Canada’s new housing industry. Specifically, housing starts were up in July 2010 from July 2009 in 22 of 27 markets covered by the publication and in some cases, the increases were exceptional. And according to the latest building permits statistics, short-term expectations for housing starts are positive in 24 of 27 markets.

But the Conference Board’s longer term perspectives on housing starts are not as positive. In fact, the Metropolitan Housing Starts publication indicates that starts should decline in 14 of 27 markets over the medium term. But again, as in the case of the existing home market, these declines will have much more to do with a return to more normal levels of activity and an alignment with demographic requirements than with a free fall in the new housing market.

It is undeniable that Canada’s housing market is slowing down. However, this should not be characterized as a free fall. Canada’s housing market is due for a pause. But, most importantly, the fundamentals of our economy remain sound. Contrary to the United States, this country’s labour market has rebounded from last year’s recession. Interest rates, while rising slowly, remain very low. This market will pause, but it will not nosedive -- in contrast to the housing market south of the border, which is still battling a large inventory overhang that should keep it from rebounding promptly even if employment were to rise swiftly.

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