Canada’s housing markets, some reflections

The Canadian housing markets, as of late, have alarmed many a households and economists in Canada. Unlike the United States, where the housing market struggles even today to dig its way out of the housing slump, the Canadian housing markets started to recover as early as in January 2009. The sudden reversal in housing fortunes in Canada is indeed a concern for the market watchers and seller households searching for home buyers.

The Canadian housing recession was relatively short-lived. The nominal housing prices after rising steadily since 1996 dropped only  in 2008. Starting January 2009, the housing prices in Canada started their upward climb, which  continued until April 2010. However, the past few months have revealed a dismal state of affairs in the Canadian housing markets where prices have started to decline again. This is happening during summer months when housing markets in Canada usually heat up.  It is the time when multiple bids become the norm.

As the housing prices decline month after month, economists and government policy makers wonder if this is going to be a double-dip recession.

I have argued previously that the rise in housing prices in Canada in 2009 could be attributed to constrained supply rather than other market fundamentals (such as interest rates, wages, and unemployment), which have not changed much during the recent months.  The support for this argument could be found in the above graph.

In November 2008, there was an abundant supply of resale housing in the market.  The sales to listing ratio stood at 0.38, suggesting that there were 2.7 homes listed for each sale.  However, this also suggests that more sellers were active in the market than buyers.  This resulted in a drop in housing prices, which in turn brought in more buyers to the market. 

As the buyers returned to the market, the sales to listing ratio started climbing upwards from a low of 0.38 in November 2008 to 0.64 in June 2009.  In a short span of seven months, the market turned from abundant supply to constrained supply.  For every home sold in June 2009 there were only 1.5 homes listed in the resale market.  The immediate effect of constrained supply in the housing market was a steady rise in housing prices that began in January 2009 and lasted until April 2010.

As the prices climbed swiftly in 2009, they soon reached the point where buyers withdrew  from the market.  By October 2009, the sales to listing ratio had peaked.  Starting November 2009 the sales to listing ratio declined steadily and did not reverse the trend.  As more sellers entered the market than buyers, it was only a matter of time that housing prices would also reverse their direction and start declining.

Given the fact that housing markets take time to react to new information, it should come as no surprise that the changes in the demand and supply of new housing influence housing prices with a lag of few months.