Resale housing market on fire in May
By ebizniz on June 20, 2007 - 9:54pm
A recent Financial Post article Resale housing market on fire in May reported Canada's major markets was up 11.6% year-over-year to 42,039 units, and MLS residential average price rose 10.2% year-over-year to set a new monthly record of $333,524 in May.
In another article by Edmonton Journal Housing market still sizzling in May, Vancouver was reported to hit an all-time high top of $591,722. The steepest housing price increase was in Edmonton, up 47.3%, followed by Saskatoon, up 44.1% year-over-year.
The Canadian housing market appears to be insulated from the current housing slump in the U.S.A. Most Canadian economists are optimistic that the bullish Canadian housing market will be sustained through 2008. According to CREA economist Klump, "price increases will slip below 10 per cent this year to an average of 9.7 per cent, and then ease further to 5.5 per cent in 2008".
But, my view is that in Canada, house prices are over-priced by as much as 18% to 25%. The price gains on house prices cannot be attributed to the moderate income growth and annual increase in immigration and in-migration from rural areas to the city centers. The cycle of "strong demand chasing limited supply" of housing units may be close to the top of the cycle.
The market will pause or correct itself as more supply and reduced demand takes over. Housing affordability will be a limiting factor in reducing demand going forward. House prices have now reach too high a level when Canadian banks will have fewer home buyers able to qualify for mortgage financing.
Over the short term, the expected moderate mortgage interest rates increase the next few months will not have a significant effect on housing demand. Although prime fixed term mortgage interest rates had gone up from 5.5% 6 months ago to around 6.0% now, the market is expected to remain bullish even when mortgage rates are increased to 6.5% to 6.75% in the second half of 2007.
The trigger for a price correction or even a downturn will likely to be a major external financial crisis that deflates the market and shakes investors confidence. In Vancouver and the suburbs, the housing market can be monitored through data on the supply of new and resale condos, number of days on market for resale homes and MLS price reductions month-over-month.
