Canada Housing Price Plunge Seen Averted Amid Low Rates

Canada’s housing market is showing signs of a soft landing amid evidence of robust demand and buoyant new construction plans.

Home prices in Toronto, Canada’s most-populous city, rose 5.4 percent in May from a year ago, the biggest increase in five months, the Toronto Real Estate Board reported today. Statistics Canada said the value of April municipal building permits posted a 10.5 percent gain.

Housing-market data are showing few signs of a sharp correction even amid warnings from analysts and policy makers that a bubble may have been forming. Finance Minister Jim Flaherty tightened mortgage rules for a fourth time last year on concern that an overbuilding of condos could lead to sharp price declines. Former Bank of Canada Governor Mark Carney identified record household debt as the biggest domestic risk to the economy.

“The base case scenario is a soft landing,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities in Toronto. “You’d have to see rates move dramatically higher” for a major correction, he said.

Residential building permits rose 21 percent to C$4.35 billion in April, Statistics Canada said today, led by a 51.9 percent jump in condominium construction intentions.

Rising Permits

Some observers don’t think the rise in permits indicates increased demand for housing.

“I’m pretty skeptical,” John Andrew, a real-estate professor at Queen’s University in Kingston, Ontario, said in a phone interview. “Condos are a sector of housing that’s already overbuilt, so what could possibly justify that kind of surge when we’ve already seen foreign investment start to drop off significantly?”

Vancouver made one of the largest contributions to the national increase among 34 cities, Statistics Canada said, with permits rising 50.7 percent led by multifamily dwellings. Calgary permits also rose 40.6 percent to C$773 million on commercial buildings.

The multiresidential figure “is absolutely huge,” Andrew said. “That’s concerning, especially if developers have decided the market has turned the corner and they think that’s enough of a trigger to continue.”

Condos, Townhouses

In Toronto, the average sale price rose to C$542,174, from C$514,567 a year ago, while a composite home benchmark price index for the city was up 2.8 percent, the Toronto Real Estate Board reported. Unit sales dropped 3.4 percent from a year earlier to 10,182, the board said in an e-mailed statement today.

On a year-to-date basis, Toronto sales are down 9.6 percent, led by condominiums and townhouses. Detached-home sales rose in May.

“The story continues to be one of weaker volumes,” Derek Holt, vice-president of economics at Toronto-based Scotiabank, said in a note to investors. “The question is how that will carry over into construction and prices.”

Vancouver’s real estate board said yesterday home sales rose 1 percent in May from a year ago, with composite prices down 4.3 percent.

Home construction, which helped lift Canada’s economy out of recession, has been a drag on growth over the past year, falling in the first quarter at an annualized 4.7 percent pace, the third-straight drop, according to Statistics Canada data on gross-domestic product data last week.

The impact of policy changes by Flaherty and others are beginning to fade, Toronto Real Estate Board President Ann Hannah said in today’s release.

“A growing number of households who put their decision to purchase on hold as a result of stricter lending guidelines are starting to become active again in the ownership market,” Hannah said.

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