Does real estate have anything left to give in 2014?

At some point, there has to be a housing correction. Right?

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Some argue there was a correction in 2013, based on declining sales activity. But prices never really followed and by September the market was roaring as consumers raced to buy homes in a climate of fear based on mortgage rates rising in response to the U.S. Federal Reserve easing its bond purchasing activity.

The push helped real estate stage yet another comeback. By November, year-to-date sales for the entire country were up 0.2% from the previous year with 433,678 transactions, said the Canadian Real Estate Association. Prices climbed 5% over the first 11 months of the year from the same period a year earlier to an average of $382,111.

Organized real estate seems to think the worst is over. Though few are predicting the heady numbers of the past few years, CREA expects sales to climb 3.7% in 2014 with prices jumping a modest 2.3% to an average of $391,100.

Even the real estate companies have gotten a little tepid in their forecast for 2014, not quite buying into the roaring comeback in housing we saw in the fall of 2013. Re/Max is predicting a modest 2% increase in sales for 2014 Canada-wide while prices will rise 3% with Quebec City the only major market expected to show a decline in sales price.

Phil Soper, chief executive of Royal LePage Residential Services, says his company won’t be releasing its formal predictions for 2014 until January but he says it’s important to note Canada has had corrections during this boom.

“We just finished in August the most significant market correction since the 2008-2009 correction. It wasn’t of the same magnitude of the global economic crisis but it was a significant downturn,” said Mr. Soper, adding it was something his company had predicted.

Mr. Soper says the strength the market has shown since the fall will continue into the spring of 2014 with both sales and prices “considerably higher” in the first two quarters of the year.

His caveat is that mortgage financing costs don’t rise considerably in 2014. “Our forecast is based on that,” said Mr. Soper, adding changes to rules for government-backed insured mortgages probably haven’t had as big an impact on the market as people have suggested.

“A tweak to amortization or requiring a little more down payment is not enough to significantly change the state of the market. The big change will occur when the cost of money starts to rise and that won’t happen in 2014,” says Mr. Soper.

Dave Madani, an economist with Capital Economics, who has been taking his lumps for a call made almost three years ago suggesting Canadian home prices could drop as much as 25%, said the spike in home sales was really expected because of the rate fears.

“If everybody agrees sales were pulled forward then logically we have to agree you should expect weaker sales next year. You can’t have it both ways,” says Mr. Madani, adding prices usually follow declining sales.

He says the same problems of excessive valuations relative to income and overbuilding have not changed. Canada Mortgage and Housing Corp. said in December we are still building 194,000 homes on a seasonally adjusted annualized basis but we only need 175,000 on a demographic basis.

“Look at British Columbia have already fallen from the peak. The question to put to the bulls is ‘what about there’,” said Mr. Madani.

He agrees prices have risen since he made his call about a 25% decline but adds income has too, meaning the gains haven’t meant much to homeowners’ wealth.

“Our view still stands. Just because something hasn’t happened yet, hardly is that evidence it can’t happen ever,” says Mr. Madani.

But the resiliency of the market seems to have caught more than one economist off guard because, even when there has been a pullback, it’s been minimal.

“No way. It would be impossible,” says Bank of Montreal senior economist Sal Guatieri about the run housing has been on. “We also didn’t expect the overnight rate to have been at 1% or go down to .25%. To have said that a decade ago, you would have been laughed at.  Did I think the housing boom would last a whole decade? No.”

Bank of Montreal’s latest report looking at Canada’s four largest cities still sees very little risk of a crash, though it says Vancouver is probably the market most at risk of correcting in 2014.

“We are very surprised the market rebounded as fast as it did this year,” said the economist, noting prices only dipped about 6% on average for Canada’s most expensive housing market. “That city is floating on a sea of foreign wealth. The money is pouring in and sustaining, at least on the upper end, Vancouver’s housing market.”

Mr. Guatieri says Toronto’s market has continued to defy media calls for a crash and part of the reason for that is the demand for rental units has helped condominium investors find a revenue stream for the high-rise units they are buying.

“The investor is a big part of the condo market and rents are still rising. It’s not that difficult to find a tenant given the condo vacancy rate is quite low,” says the economist, noting the issue for buyers today is rent is simply not covering all the costs of owning a condo.

Investors in Toronto continue to bet on price appreciation in the face of negative cash flow, leaving them vulnerable to a market shift.

“If prices start to fall, we could see investors getting antsy and start to sell their units which could aggravate the market,” said Mr. Guatieri who nevertheless says the risk is low because  a spike in rates seems unlikely.

If there is a market that can support further price gains it is Calgary which has been a major benefactor of net-immigration growth. BMO noted Alberta attracted 53,000 more people in the last year than it lost.

“It’s not not just the rapid population growth but a young population and those are your first-time buyers,” said Mr. Guatieri, noting Calgary had a correction back in 2008-2009 when average prices fell 16%.

But the idea of a crash in 2014? He just doesn’t see it happening.

“I see [price growth ] still and that’s definitely true in Calgary. In Vancouver there is risk of prices [going down] but I mostly see them stabilizing,” said Mr. Guatieri, adding all bets are off in raising interest rate environment.

Garry Marr | December 17, 2013

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