Tuesday, August 05, 2008

RBC comments on Canadian Housing market losing its edge but not headed for a crash

Housing market losing its edge but not headed for a crash

Canada's resale housing market showed signs of slowing early in the second
quarter with sales off 1% from the first quarter of 2008 following three consecutive
quarterly declines. However, sales continue to run well above the average
pace of the past 20 years. While strong demand boosted prices, with gains of at
least 10% in the past six years, the pace slowed to 3.2% in April.

In contrast, new listings picked up in the first quarter and this trend continued into April, with
listings in the major markets up 17.7% compared to a year earlier. Slowing in the
housing market was expected and, to some degree, desired because affordability
had been increasingly strained through 2007, with most major markets seeing
affordability deteriorate to its worst levels since the early 1990s.

On the supply
side, the high level of demand continues to support construction activity with
housing starts running at an historically fast rate. The structural backdrop to
Canada's housing market remains solid, with very limited sub-prime mortgage
activity, a relatively small speculative sector and no significant supply overhang
despite robust construction activity.

Affordability is also forecast to improve
this year, with the Bank of Canada having cut the overnight rate by 150 basis
points since last December, mortgage rate spreads showing some signs of narrowing
and the pace of house price gains slowing.

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