CREA's April report signifies downward trend for 2011, 2012: TD Economist


Alexander agreed with CREA’s analysis that the federal mortgage rule changes introduced on March 18 contributed to April’s dip in activity. But the latest decline won’t stop here, he said. Once the Bank of Canada (BoC) resumes raising its key interest rate, housing demand will moderate further, he said.

Even though the Canadian economy is, according to the BoC, on track to grow 4.2%  this year and inflation rose above 3% in March, Alexander said the BoC has been reluctant to raise the overnight lending rate because of a number of risks in the global economy, including the slow recovery in the U.S., the sovereign-debt crisis in Europe and rising inflation in emerging markets.

“All of the economic indicators suggest that the Bank of Canada should be raising rates right now, but I think they’re in wait-and-see mode because there are all of these global risks out there,” he told CRE Online.

To keep inflation in check here at home, though, Alexander said BoC Governor Mark Carney will have no choice but to raise the bank’s key interest rate.

TD Economics had originally forecasted that the BoC would raise its overnight lending rate by 25 basis points in July, but in light of Carney’s speech on May 16, Alexander said TD has revised its forecast to September. TD Economics expects the bank will raise the rate until it reaches 3% by mid-2012.

These successive interest rate hikes will depress real estate activity in the latter half of 2011 and through 2012, Alexander said.

“I think next year we’ll see about an 8% decline in sales, and I think we’ll see home prices pulling back by a couple of percentage points. But I do not think that monetary tightening will lead to a significant correction in the marketplace.”

CREA’s report found that seasonally adjusted sales activity edged down in April by 4.4% from March, while actual sales activity on a year-over-year basis dropped 14.7%.  The largest declines in sales activity occurred, as expected, in larger urban centers, such as Vancouver, Fraser Valley and Toronto.

Despite the falling demand, the national average selling price in April rose to $372,544, up 8% from the same month last year. That marks the third consecutive month that the average price has increased by 8% on a year-over-year basis in 2011.  The national average price has been experiencing upward pressure largely because of high-end home sales in Vancouver.

CREA economist Gregory Klump said in a statement released Tuesday that the softening in sales activity is a product of the mortgage rule changes introduced earlier this year. These changes, like the ones last year, pulled sales forward as worried homebuyers raced to beat the March 18 deadline.

“Last April, several transitory factors artificially boosted sales.  This included the impending tightening of mortgage rules, speculation about higher interest rates and the looming introduction of the HST in some provinces.  This year, additional measures to tighten mortgage rules were implemented in March and the other transitory factors were absent,” said Klump.

“This makes it difficult to compare the two months in order to reliably gauge the impact of the latest round of mortgage rule changes.”

One other factor the housing market will have to deal with as demand falls is rising supply. The number of new home listings in April rose 1.3% from March on a seasonally adjusted basis.

In combination with fewer sales, the national sales-to-new listings ratio came in at 52.5% in April, down from 55.7% in March.

Another gauge of the market is the number of months of inventory, which represents how many months it would take to sell the current amount of inventory at the current rate of sales. The national measurement came in at six months at the end of April, up from 5.7 months in March.

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