Canadian, U.S. housing markets defy expectations, price gap hits record

The gap between the average price of a home in Canada and the United States widened to a record level in the first quarter of this year, contrary to what economists would have expected, according to Bank of Montreal’s chief economist Doug Porter.

Average Canadian home prices were 66 per cent above average U.S. prices during the first three months of this year, he says. (Note: these are prices for existing houses and condos, not those that are newly constructed).

“The main takeaway is that, contrary to all expectations, the Canadian housing market has just kept on rolling in 2014 even as the U.S. housing market has  paused for breath (after a steep climb out of the dungeon),” he writes in a research note. “Put it this way, how many pundits a year ago were calling for Canadian home prices to rise faster than their U.S. counterparts in any single measure?”

This time last year it was far from clear when and if the Canadian housing market would emerge from the sales slump that ensued after former Finance Minister Jim Flaherty tightened the country’s mortgage insurance rules. 

It was a different story in the U.S.: a Dow Jones News Service article from April 2013 reported that home prices across the nation were “rising at the fastest rate in seven years, with some communities seeing double-digit gains, as buyers are returning to a market where the number of properties for sale is in short supply.”

It needs to be pointed out that there are many problems with comparing average Canadian home prices to average U.S. home prices, not the least of which is that average prices themselves can be highly misleading. Mr. Porter is aware that it’s not an apples-to-apples comparison.

 “Some may quibble that this doesn’t take the exchange rate into account, but even adjusting for the Canadian dollar leaves a 50 per cent price gap,” he writes. “Some may also quibble that the reported average price is not the most indicative of underlying trends, which is probably besides the point.”

Many economists were surprised by the strength that Canadian home prices showed in the face of the steep sales drop that began in the summer of 2012. And they're surprised again now that the slump in sales over the cold winter months hasn’t had more of an impact on prices.

Will Dunning, who has his own housing research business and is also chief economist of the Canadian Association of Accredited Mortgage Professionals, tells me that he thinks home prices have turned.

Using data from the Canadian Real Estate Association, he says that sales of existing homes rose last summer and peaked in the August-September period.  “There has been a slight rise during the past two months, but I don’t see this as meaningful,” he adds.

“Similarly, the sales-to-new-listings ratio rose, but has fallen back,” he says. “The rise should have meant that price growth accelerated; the recent drop in the ratio should be causing a deceleration of price growth.”

He then turns to the Teranet-National Bank home price index, which shows a very gradual increase in prices over the last while. (Averages can be distorted by changes in the types or locations of homes that are selling, for instance if a large number of sales are occurring in a pricey part of Vancouver, and the home price index seeks to account for that).

Mr. Dunning says that if you take the price index and seasonally adjust it, it shows a sharp pick-up in price growth around the time he would have expected it to have occurred, and “the last data point hints that on a seasonally-adjusted basis, the period of rapid growth has ended – when it should have.”

The Globe and Mail