Hit fourth straight monthly record in July, but construction of new units tailing off

Lori McLeod – Globe and Mail

Sales of existing homes in Canada set a blistering pace again last month, and show few signs of letting up for the rest of the year.

Resale home transactions hit a fourth straight monthly record in July, with the average price rising to $332,442, a 13.1% increase from the previous July, according to statistics released yesterday by the Canadian Real Estate Association.

Sales are expected to reach 514,450 units for the year, the highest level on record and a 6.5% increase over last year.

Before the U.S. subprime mortgage crisis and its impact on the credit markets, this strength may have tipped the scales in favour of an interest rate increase when the Bank of Canada meets next month, said Douglas Porter, managing director and deputy chief economist at BMO Nesbitt Burns Inc. Now, it will probably lessen the likelihood of an interest rate cut if the credit trauma worsens, he added.

“The latest resale data again show precisely zero signs of a let up. Absent the credit market turmoil, the bank would surely be tightening again in September… but that’s like saying absent John Wilkes Booth, Abe would surely have enjoyed the play,” Mr. Porter said in a research note.

The average price of a resale home in 2007 is expected to rise 9.9% over last year, primarily due to strength in Western Canadian markets, according to a report yesterday from Canada Mortgage and Housing Corp.

Higher real estate prices, however, along with mortgage rates that have risen about three quarters of a percentage point since the start of the year have started to put a damper on new home construction.

The number of new homes built this year will drop in every province except Manitoba, Quebec and Saskatchewan, all of which are being bolstered by steady economic growth and job creation, according to the CMHC’s third-quarter outlook.

“Despite high employment levels, income gains and low mortgage rates, housing starts will trend downwards in 2007. The slight pull back in housing starts this year and next will be mainly due to the continued growth in real estate prices coupled with modest increases in mortgage rates,” CMHC chief economist Bob Dugan said.

A total of 220,000 new housing units are expected to be completed this year, a 3.2% decrease from 2006. This is seen declining to 207,200 new units in 2008.

Mr. Porter said anything in the range of 200,000 housing starts a year still indicates a “very strong” real estate market. Existing home sales provide a better gauge of consumer confidence and discretionary spending on items including furniture and appliances than new construction does, Mr. Porter said.

Existing home sales and prices are expected to increase next year at a more moderate pace, with sales seen hitting 494,750 units in 2008 and prices rising 5.2%, CMHC said.

Spending on home renovations is expected to increase by 9.8% to $49.9-billion in 2007 compared with 2006, and by 6.8% in 2008 to $53.3-billion.

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