The "real estate crisis" in Toronto is not what people might make it seem. It is not so much a crisis as it is a correction. Just like a balloon, after real estate prices inflated to a point of instability, the market finally popped.
There are more signs that Canada's housing market is facing a significant slowdown after a double-digit percentage drop in home construction starts last month, aswell as a forecast that sales and prices will slide this year. As the recession digs in and the unemployment rate rises, nervous consumers are standing still when it comes to buying and selling real estate.
The results are increasing numbers of dwellings on the market, dropping prices and a slowdown in construction. The Canadian housing correction is in full swing, having a wide impact across the country. Canada Mortgage and Housing Corp. reported housing starts fell to a seasonally adjusted annual rate of 153,500 units in January, down 10.9 per cent from December in the steepest monthly drop since March 1995.
It was the fifth straight decline and left home construction at its slackest pace since 2001, well below market expectations of 169,000. Aswell, the Canadian Real Estate Association predicted house prices nationally will fall eight per cent this year as the number of Multiple Listing Service sales tumbles 16.9 per cent to 360,900 units.
Three months ago, the association was forecasting only a 2.1 per cent price slippage for 2009 on a three per cent decline in the number of sales. Its latest forecast would represent the smallest national MLS sales volume since 2000, following a 17.1 per cent drop in 2008.
Although there were some incentives for home buyers in the recent federal budget, they won't take hold until there is an improvement in buyer psychology. The Jan. 27 budget included a plan to expand the insured mortgage purchase program by $50 billion to $125 billion, which is meant to encourage banks to increase mortgage lending.
Ottawa also increased the RRSP withdrawal limit for qualified home buyers to $25,000 from $20,000, and introduced up to $750 in tax relief for closing costs for first-time buyers.
The home market is in "retrenchment mode." It's no surprise that home builders are pulling back, facing slowing demand and increasing amounts of unsold inventory. What you are also seeing now is that the condo market has finally cooled off. Canada has nowhere near the housing crisis as the United States, where risky lending has made foreclosure sales common.
CMHC said in its report that overall housing starts declined across the country, with a lot of the steam coming off the hot market that had prevailed in most of Western Canada.
Reduced sales and increased listings in the existing-home market have led to reduced spillover demand in the new-home market.
Improved home affordability will likely support starts this year at the pre-boom level of about 150,000, but if starts continue on this downward momentum without signs of stabilization, even this prudent forecast could fall by the wayside.
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