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Has the Cooling Peaked?

16 January 2013

It can no longer be argued whether or not the Canadian mortgage and housing market is cooling. The newest stats have been released, comparing the 2011 market with that of 2012, and the stats can seem bleak, depending on which side of the fence you’re sitting. Total sales dropped by a whopping 17.4 per cent last month when compared with December of 2011; but prices were still up. In fact, prices don’t seem to be going anywhere too fast, as they inched ahead by 1.6 per cent when compared with 2011’s market. So with such little price increases, and such fast-falling sales there’s only one question: has the cooling peaked?

That cooling of course, is one that’s been put into place by Finance Minister Jim Flaherty and the Conservative government. Seeing a market that was far too hot to be sustainable for any period of time, and that could actually put the country in danger, Flaherty introduced his fourth round of mortgage rule changes last July. It went unquestioned that this would have an effect on the housing market, although how much or how little largely remained to be seen. Now, six months after those changes were made and with sales falling, falling, falling, people are beginning to wonder if this cooling period has hit its peak.

Sonya Gulati, senior economist with TD Economics, seems to think so.

“With the whopping 17.4 per cent year-over-year change in sales seen in December, we suspect that the impacts from the mortgage rule tightening in July are now fully priced in,” she says. “We expect the Canadian housing market to stabilize at current levels over the next few months. When looking at previous mortgage rule tightening episodes, the housing market impacts have been temporary in nature. There is no reason to think that this time will be any different.”

But that’s awfully positive. Prices haven’t even started to come down and already those at TD are predicting this cooling period to last only a few more months. That would be an incredibly short cooling period, and would make the market hot again just as interest rates are predicted to start going up again.

And while rates could stay on hold into 2014 and sales can continue to fall, the simple fact of the matter is that we need to see movement on prices before we can even begin to think that this current cooling is anywhere near over. Benjamin Reitzes, senior economist with BMO Capital Markets, says that’s what we’re experiencing now.

“While some will focus on the deep dive in sales from a year ago, it looks as though prices are providing a better read on the health of the sector, as homeowners are in no rush to sell. Prices are easing gently, consistent with a soft landing throughout much of the country.”

‘Easing gently’ may be accurate, but prices are going to need to come down much farther before we can say that we’re out of the cooling period. The mortgage rules were put in place over the summer specifically to stop the overvaluations happening with so many properties, and to protect homeowners and homebuyers for the day that prices started to fall.

The simple fact of the matter is that they haven’t dropped enough yet. And even Jim Flaherty would like to see more of a decline when it comes to prices.

“I am actually pleased,” the Finance Minister told The Globe and Mail in an interview regarding the cooling housing market. “Because we needed to take some of the steam out of of the rapid increases in prices in the residential housing market, particularly the condominium market.”

And that steam will likely continue to whoosh out of the housing market creeping even farther into this year. Once those interest rates rise, prices will decline even further and maybe then we can say that the cooling period has peaked.

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