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Say it ain't so - Why Canada's housing market won't come crashing down

A huge inventory of unsold homes in the U.S. reflects a market where supply had overshot demand by a significant margin. One proxy for the existing home supply-demand balance, listings as a ratio of sales, is not only close to 30% above the historical average from 1988-1000, it has also surged to double the relative supply average of 2000-2005. As a consequence, after having peacked in mid-2005, home price appreciation plummeted from 15% into negative territory within a year. Much of the run-up in home prices was also led by lax mortgage financing conditions which do not prevail in Canada. Home prices in the U.S. are unlikely to rebound until this large inventory overhang can be unwound.

In stark contrast, the Canadian housing market supply-demand balance is well within range of the average since 2000, which is itself 30% lower than the previous decade's average relative supply. In others words, Canada's home price gains are well supported by a high demand relative to supply, which is in turn well supported by strong economic fundamentals. Comparing current conditions to the disconnect that was prevalent at the time of the housing bubble of the late 80s also drives this point home. So while the U.S. housing market isn't likely to recover before the third quarter of 2008, the likelihood of a severe correction in the Canadian housing market as a whole, akin to what the U.S is currently experiencing, is marginal.

Toronto - In Cruise Control

Canada's largest metro housing market is experiencing a well-behaved soft landing. Housing starts and new home sales should continue to edge down gradually, as they been since 2003. First-time homebuyers increasingly are looking to the more affordable condo segment, and new condo apartment sales for 2007 should near the record-breaking level of the past two years. Furthermore, more existing homes listed for sale has opened up resale market opportunities and meant a diminished need for new single units. Demand for newly-built condos has remained robust in 2007, with the share of multiples accounting for 2 out of 3 starts.


Studying the underlying economic conditions, we note that even if Ontario isn't Canada's job creation engine to the same scales as it once was, Toronto's metro area continues to drive the province forward, usually faring better than the province as a whole. Its labour market is tight, as evidenced by a generational low unemployment rate, especially in service-producing industries. Wage and employment growth will probably continue to perform on par with Canadian averages, and the moderate pace of home price growth will also help contain potential erosions in home affordability. Furthermore, Toronto continues to attract the largest share of international immigrants into Canada, and the outflow of workers to western Canada is expected to ease as western economies come back down to earth.

As a result of solid demand, the existing home market has tightened this year as sales have outpaced listings. Home prices typically adjust to reflect market conditions with a lag, and this suggests an uptick in resale home price growth for 2008, which we expect to be close to 6%. Overall, Toronto's market conditions should continue to be balanced. As a testament to this balance, notice that resale home price growth has held in a reasonable 3-10% band throughout the last decade. Steady as she goes, then, for Canada's largest housing market, which, looking around to other housing markets these days, is a rather enviable prospect.


TD Bank Financial Group - Economics
Housing Monitor
September 21, 2007

Posted on Monday, October 15, 2007 at 11:20AM by Registered CommenterElaine in | Comments1 Comment

Reader Comments (1)

All these positive economic signs are supporting the future growth potential for Canada, which is a great news for us a<a href="">Toronto real estate agent</a> . The supply-demand curve has been healthy so far into the new year. Low mortgage rates and moderate tax rates are all in favour of Canada's housing market, which will hopefully prosper for long time to come.
February 6, 2008 | Unregistered CommenterToronto real estate

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