Canada's Remarkable Housing Rebound

Economists are running out of superlatives to describe the rebound in Canada’s housing market, in which sales are up over 60% from earlier this year. “The speed and magnitude of the rebound in sales activity is remarkable," says the Canadian Real Estate Association (CREA). Association president Dale Ripplinger says, "The difference in the resale housing market now, compared to the beginning of the year, is night and day."

"The Lazarus-like rise in sales has halted the slide in prices “ says Douglas Porter, deputy chief economist at BMO Capital Markets. "The turnaround in Canadian housing this year might be the single most surprising turnabout we've seen in any economic indicator I can think of. The extent of it is nothing short of amazing,"

Most economists were caught by surprise, and most of them have had to revise their real estate forecasts for this year. CREA predicted in May that MLS sales in Canada would drop by 14.7 per cent this year compared to 2008. Now, it says sales will decline by just 0.4 per cent. The association also says prices will rise by 1.5 per cent this year. Canada Mortgage and Housing Corp. (CMHC) also has a revised forecast, and is calling for a small drop in sales activity and sales.

In the Toronto market over he past three months, resale activity has been much stronger expected, and the sales rate has been raised very substantially.

So what happened? Why is housing leading Canada's economic recovery?

"Low interest rates are boosting sales by returning homebuyers to the market who dropped out last year," says Gregory Klump, CREA's chief economist. "Buyers are also shifting purchase decisions forward as they take advantage of attractive interest rates .

With prices and activity down early this year, many sellers decided to take their homes off the market until the situation improved. That created a shortage of listings, and thanks to the law of supply and demand, stopped the slide in prices. In August, it's been reported that 14 per cent of listings in the Toronto market had multiple offers submitted.

"Yes, Virginia, it's a sellers' market again," says Porter. "The biggest, priciest, and previously hardest hit markets are the very cities that are now rebounding most rapidly."

Now, the economists are over their shock and are throwing cold water on the idea that the market can continue to expand at this rate.

Klump says that since buyers moved their purchases ahead to take advantage of low mortgage rates, next year will see a more stable market.

The strong pace seen in the second quarter of this year reflects, in part, activity that was delayed in the previous two quarters and is not likely to be sustained," says CMHC. "The level of sales will move back to be closer in line with improving economic conditions."

Only Porter at BMO Capital Markets seems to be hedging his bets in predicting the boom times are over. "Record-low borrowing costs and the mounting sense that the worst of the economic storm has passed are the key ingredients in the remarkable turnaround," he says. "We keep saying that further gains will be harder to come by, but the market keeps churning out those gains."