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Canada’s hot housing market is showing further signs of cooling, with Vancouver posting a nearly 28-percent plunge in June sales, according to the Canadian Real Estate Association.
June home sales fell 1.3 percent from the previous month and are down 4.4 percent from a year earlier -- the first year-over-year drop in sales since April 2011.
Vancouver -- which up until last year was the epicenter of the country’s booming housing market -- led the decline, posting a 27.7-percent fall in home sales from the previous year.
"Home buyers didn't rush their purchases before the most recently announced changes to mortgage regulations came into effect," Gregory Klump, CREA's chief economist, said in statement. "That's a big change compared to what we saw as a response to previously announced changes. It will take some time before the compound effect of previous and recent changes to regulations on Canada's housing market becomes apparent."
In June, Ottawa announced new regulations for government-backed mortgages, which included shorter amortization periods and shrinking the amount homeowners can borrow against their homes.
Prices also fell in June, with the national average selling price down 0.8 percent to $369,339 from last year.
Again, Vancouver led the way in falling prices, with the average price slipping 13.3 percent from last year to $808,867.
But CREA says if Vancouver is stripped out, then national prices would be 3.2 percent higher than they were last year.
“Today’s report provides more evidence that the housing market is beginning to come down to earth,” says TD economist Francis Fong. “The pace of activity in the market over the past few years was simply unsustainable given the economic backdrop and was mainly being fuelled by the record low level of interest rates.”
TD is calling for a 10 to 15-percent drop in home prices over the next three years.
“While this appears to be a significant contraction, it is important to note that this only brings the average price down to its mid-2009 level, essentially unwinding the imbalance that has developed over the last few years as households have taken advantage of the favourable interest rate environment,” Fong says.
The number of newly-listed homes rose 1.4 percent in June from the previous month, led by Toronto which posted its second consecutive increase. New listings in Toronto are 12.3 percent higher than last year.
CREA said around 42 local markets, out of 100 across the country, posted a monthly increase of new listings of at least one percent.
The number of months of inventory -- which is the amount of time it would take to sell housing stock at current rate of activity -- edged higher to 6 months in June from 5.9 in May.
HAS THE HOUSING “TIPPING POINT” ARRIVED?
Soaring home prices over the past decade and a boom in construction has recently raised concerns among some of the country’s realtors.
Last week, the Canada Mortgage and Housing Corporation (CMHC) reported housing starts rose in June, while economists were expecting a drop.
Housing starts swelled to 222,700 units from the upwardly-revised number of 217,400 in May.
“It is becoming somewhat worrisome that Canada is building more houses than we probably need. We’re building houses faster than warranted by the growth in the population and household formation,” Sal Guatieri, senior economist at Bank of Montreal, tells BNN.
He anticipates housing starts will cool down “dramatically” over the second half of 2012. He points to the recent pull back in sales as evidence of a looming slowdown, as the pace of home building often lags sales.
Realtor Royal LePage says real estate is at a “tipping point.”
President Phil Soper says while home prices have increased for the past three years -- with the average price of a home rising 3.5 to 5.5 percent in the second quarter of 2012 from last year -- those gains can’t continue indefinitely.
"Confidence in Canada's real estate market is sound, but home prices cannot grow faster than salaries and the underlying economy indefinitely. Some regions have reached or perhaps even exceeded the current upper level of price resistance as buyers have embraced an era of historically low mortgage rates,” he says.
Guatieri agrees, adding that Canada’s housing market can’t continue to reach new heights, either in increasing prices or growing housing starts. He expects home prices to stabilize and possibly decline in high-priced regions like Vancouver and Toronto.
“I think people are taking a little more notice about the elevated prices in many of the cities, the fact that the mortgage rules will be tightening. And at some point, the interest rates will likely go up. Not for a long time, but at some point,” Guatieri says.
“So we are seeing buyers be a little more cautious. And at some point, we should see housing starts and construction pull back alongside the weakening in demand.”