This weeks top stories include how people are asking if home prices in Canada can continue to rise, how the Canadian Real Estate Association has raised their sales forecasts for the remainder of the year, how there is a housing price correction on the horizon, how Toronto has surpassed New York as one of the most expensive cities in the world, how Statistics Canada is saying the baby boomer generation will slow down Canada’s rate of growth and how Canada’s wholesale showed some gains in the month of June.
Can home prices continue to rise? No they cannot! Average home prices in Canada reached an all time high of $371 000 during the spring of this year. Toronto and Vancouver lead the way with the average home price in Toronto reaching $456 000 and Vancouver reaching $786 000.
There has been a minimal decrease in home prices during the last month or so but the Toronto and Vancouver markets home prices are double what they were ten years ago. That’s compound appreciation of more than 7% a year. It’s odd because virtually every other financial asset, excluding gold, has declined in real value and housing prices south of the border have tumbled more than 30%. It’s inevitable that a housing correction is on the way.
The average household income in Canada is roughly $55 000 after tax. This has to cover mortgage expenses, the cost of kids, clothing, food, transportation, retirement savings and utilities. This is a number that’s increased only 10% in the past 10 years, while housing prices more than doubled. Although mortgage rates have declined, without an increase in wages affordable homes are a thing of the past. What do you think? Please comment below.
Stronger than expected activity and higher home prices in the second quarter of this year have lead the Canadian Real Estate Association (CREA) to revise its forecast for national home sales upward for the remainder of the year. CREA previously stated that sales this year would be down when compared to last year by 1%.
However, strong second quarter performance and strength going into Q3 leads CREA to believe that sales will finish slightly ahead of last year’s figures. When looking at the overall picture, 450 800 housing units are expected to be sold across Canada this year, which is up less than 1% from last year, with the average home sales prices being slightly more than last year’s figures.
Looking at Provinces, British Columbia’s 2011 sales forecast has been revised upwards with stronger than expected activity in Ontario expected to offset less demand in Quebec, Newfoundland and Manitoba. Potential interest rate increases have been held off by a weaker than expected economy, which has kept house prices from declining. What do you think? When can we expect to see a drop in home prices? Please comment below.
The Canadian Real Estate Association (CREA) stated that it expects the national average home price to increase by 7.2% this year and reach $363 500. Most of the increase can be attributed to the Toronto and Vancouver markets where home prices have been increasing year over year without an end in sight. But now the end is in sight.
CREA stated, “The national average home price is expected to moderate in the second half of 2011, returning to normal following a heavily skewed start to the year.” CREA reported that sales were down in the month of July by 0.1% when compared to the previous month. Prices were down 0.3% and listings were up 0.9%. This, according to the theory of supply and demand, is the beginning of decreased home prices in Canada.
TD Bank economist Sonya Gulati stated, “While national sales have been edging lower on a trend basis since the beginning of the year, resale prices seem to have leapt on the bandwagon. This is not surprising given the two- to three-quarter lag often seen between resale activity movements and changes in resale home prices. Less favourable economic fundamentals, combined with new mortgage rules in place, are beginning to clip the wings of the Canadian housing market activity. With uncertainty permeating markets regarding the state of the global economic recovery, we continue to expect that real estate activity with temper over the next 18-24 months.”
With interest rates being so low for so long, the only thing this is doing is delaying the inevitable expected adjustment in the market. Toronto and Vancouver and extremely vulnerable to an adjustment when compared to other markets due to home prices being overvalued by as much as 25% in some areas. We will see majority of the correction next year but you can bet that when the Bank of Canada increases interest rates, we will see a decline in home prices.
According to UBS rankings of the world’s most expensive cities, Toronto is now more expensive to live in than New York City. Both Montreal and Toronto have dropped in the rankings when compared to last year. This is due mainly to currency gains against the weakening U.S. dollar.
Toronto was down one spot in the rankings and came in at ninth place with Montreal dropping eight spots from last year, down to 17th place. The list is based on the relative cost of a weighted basket of 122 goods and services and excludes rent. Oddly, Vancouver did not make the list with New York City; the benchmark city used in the index, has dropped out of the top 10 and was ranked in sixth spot last year. New York is still the most expensive city in the United States but is listed at number 14 on the list. UBS commented by saying, “Typically, New York was featured in the top 10 in the past. This can be attributed to the general depreciation of the U.S. dollar.”
Sydney Australia has made its way in to the top 10 this year on the basis of a 19% gain in the Australian dollar when compared to the greenback. Sydney has become more expensive on the heels of a strong Australian dollar but income levels have increased accordingly as well. Will this all change when the greenback rises? Only time will tell.
Statistics Canada released a report this week stating that Canada’s labour force has continued to grow but that retiring baby boomers are slowing the rate of growth to bare minimums over the next 20 years. The report outlined that there could be as many as 22.5 million people working in Canada by 2031, which is up from last year’s report that stated only 18.5 million workers by 2031.
The rate of growth is projected to slow to between 0.2% and 0.7% a year from 2021 to 2026. This is a drastic change from when the baby boomers were entering the job market back in the 1970s when the labour force saw an increase at an average rate of over 4% a year. In 1981, there were almost six people working for each retiree. In 2031, it’s expected that there will be only three people working for each retiree.
2031 is the year that the entire baby boomer generation will reach the age of 65. Statistics Canada did comment by stating, “The projected decline in the overall participation rate over the next two decades would be largely attributable to demographic phenomena, such as the aging of the baby boom cohorts, increasing life expectancy and a fertility rate below the replacement level of 2.1 children per woman.”
Canadian wholesale sales beat expectations rising unexpectedly in the month of June. The rise was mainly attributed to agricultural products and reflecting higher import costs according to Statistics Canada, which released the report yesterday.
The value of purchases was up 0.2% in June to $47.8 billion after witnessing a 2% increase in the month of May. The may amount was revised from its earlier estimated amount of 1.9%. Analysts were expecting to see a decline in the month of June by as much as 0.5% but after removing the impact of price changes, wholesale sales base on volume were down 0.5% in the month of June. The June increase primarily reflected higher prices for the imported products that are sold by wholesalers. This was partially attributed to the depreciation of the Canadian dollar relative to the American dollar during the month.
Four out of the seven sub sectors tracked by Statistics Canada had shown gains in the month of June. The report was brighter than expected but a decline in volume terms posted a negative contribution to monthly Gross Domestic Product (GDP). This points directly to a weak month of June that went on into July. What do you think? Will we turn around the wholesale sector? Please comment below.
Please note that I will be away next week and we will be back with the most up to date mortgage related news on September 2, 2011
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