Economist predicts cooler housing market

Deteriorating home affordability a factor
by John Clinkard
Consulting economist John Clinkard of Reed Construction Data writes that housing demand in Canada will shrink in 2008, due to deteriorating home affordability.
Record year-to-date sales of existing homes in June, along with double-digit increases in house prices, reflect a still-very-hot Canadian housing market as we reach the midway point in 2007.
According to the Canadian Real Estate Association (CREA), 31,000 homes were purchased in June through the MLS system in major markets in Canada. In fact, June marked the third consecutive month that seasonally adjusted sales have reached a record high. In the month, the total dollar volume of home sales, the number of new listings and the average price also reached unprecedented levels.
The pattern of sales across the country shows that sales were not all concentrated in the West either. For example, while the number of homes sold in Regina was up by 43.3% year over year and by 32.8% in Saskatoon, it was also up by 25.7% in Kitchener-Waterloo, 19.7% in Toronto, 18.5% in Montréal, 37.5% in Thunder Bay and 35.6% in Saint John.
The strength of housing demand appears to have been the result of two key drivers. First, the economy added 168,000 full-time jobs in the first half of the year, 22% more than were created during the same period in 2006. Second, recent increases in interest rates —and concerns that they will go higher — have given first-time buyers a strong incentive to purchase before their carrying costs become prohibitively high.
Looking forward, we expect that housing demand will shrink due to further deterioration of affordability.
According to a recent Royal Bank study, home affordability fell in the first quarter and is likely to move lower in the second half due to three factors.
First, average house prices have increased at double-digit rates through June and show few signs of slowing markedly before the end of the year.
Second, interest rates have already increased by 25 basis points and are likely to increase at least once more before the end of the year.
Third, higher land transfer taxes, the introduction of which were recently postponed temporarily in Toronto (which accounts for approximately 20% of Canada's home sales), will dampen housing demand in the metro area and force up prices in the surrounding regions.