Market Commentary
December 2012 Real Estate Statistics Analyzed
January 21, 2013 | Posted by: Francine Tracey
The Numbers: December Data from CREA - Analysis Courtesy Of MCAP Mortgage Canadian housing market sales data for December was published early last week by the Canadian Real Estate Association and it’s time to try to figure out what the numbers are telling us. The data for all of 2012 is obviously also now complete and there are longer-term trends to be evaluated as well. Data from both the month of December and 2012 as a whole can be interpreted in very different ways, depending on which data points are emphasized and on what conclusions analysts want to draw from them.
The business press has focused on the sharp year over year drop in sales volumes in December and on the continuation of this trend which carried through the entire second half of the year. The first figure which jumps out is the 17% decline in sales volumes nationally in December, compared to December 2011. This represented the sharpest year over year monthly drop since October 2010 and the seventh time sales volumes have dropped in the past eight months. In isolation, these figures might indicate that real estate markets are unravelling quickly and headed for a sharp correction, as has been predicted in some circles. Total re-sales in Canada in 2012 totalled 453,372 which represents a 1.1% decline from 2011 and is 1.4% below the ten-year average.
However, there are also some encouraging signs which should quiet the housing market bears: home prices and the number of new listings. We know that price movements have historically lagged changes in activity levels by anywhere from three to twelve months. This time around, price softening appears to be both orderly and modest. In the second half of 2012, the MLS Home Price Index (which makes adjustments based on the mix of homes sold) has declined only 1.5% and, with the strength of the first six months of the year, average prices for 2012 were 0.2% higher than 2011 – hardly a reason for panic. Average prices in December were up 1.6% year over year.
Perhaps the most relevant and interesting data point relates to the number of new listings which dropped 1.3% from November to December. There is also clear evidence that sellers are choosing to let existing listings expire rather than accept low offers which, if accepted, would move housing prices downward: “The decline in new supply may reflect purchase offers below the asking price that is made to sellers who are under no pressure to sell. Instead, they choose to take their homes off the market once their listing expires”, explained CREA’s Chief Economist. If this trend continues, it should help to keep the market in balance, where it clearly
remained in December with the sales to new listings ratio rising slightly from 50.4% to 50.8%, squarely in the middle of the criteria for a balanced market.
The fact that key economic indicators in Canada continue to be positive - particularly in terms of strong employment growth over the past two months which is expected to continue - means that sellers are generally inclined to wait until market conditions improve rather than sell now, as some of them would be forced to do if employment levels were contracting. This strength in the general economy is making real estate markets “self-balancing”, at least for now. When
home prices drop sharply, they usually do so when too many sellers feel the need to exit the market, tipping it into buyer’s territory and then sometimes into a self-fueled downward spiral. If government instituted changes to insured mortgages were intended to cool the market but only enough so as to preserve the likelihood of a “soft landing”, then they appear to have achieved the desired result – at least so far. In fact, the federal finance minister has commented that he is pleased with recent developments in Canadian housing market, repeating that the goal was to create a more sustainable trajectory for the housing market and avoid the consequences of a severe correction.
The economic research departments of Canada’s banks weighed in on the CREA December data with some short-term forecasts of their own. RBC projects that in 2013, pre-sales will fall to 444,400 (from 453,400 in 2012) and prices will decline 1.5%. TD takes a somewhat more bearish view in repeating that “prices have deviated from underlying economic fundamentals” such as the price-to-income ratio. They also project that when rates rise later this year, home prices will “resume their downward trek”. BMO thinks that “while some will focus on the deep dive in sales from a year ago, …prices are providing a better read on the health of the sector, as homeowners are in no rush to sell” – and this is “consistent with a soft landing”. Scotia said that, on balance, “we expect that there is more downside risk than upside risk to both sales and pricing for the time being”.
As the lead up to the 2013 spring real estate market swings into gear now - some six months after the new mortgage rules have been in effect - and with most of Canada’s housing markets firmly in balanced territory, will the market psychology which has produced the soft landing we have experienced since August continue?