Canadian Housing Market – Bullish Or Bearish?

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By Elli Davis, September 16, 2009

The Wall Street Bull by herval

A very positive look at the Canadian housing market appeared in a recent article from Scotia Capital. They are wondering: Why is the Canadian real estate sector head and shoulders above other global real estate markets? Is the potential more for a bullish or a bearish trend?

Good conditions in the Canadian market are indicated by several factors. A big rise in listings stock from the spring was erased within a very short time period. It goes hand in hand with the stock of unabsorbed newly constructed homes, which dropped mainly due to the inevitable reductions in developers’ margins. But the most appreciated condition is the non-existing hidden stock of foreclosed homes. These hidden listings represent the biggest problems in the US market.

The main reason for the overall good health of the Canadian real estate sector is disputable, but most of the experts believe it’s based on the stimulus efforts of the last year. Unlike USA, where the tax stimulus package is time limited and has mainly a short term effect, Canadian packages mostly don’t have an expiry time.

We are talking about RRSP withdrawal limit increase, first-time home buyers’ tax credit, home renovation tax credit or energy and home retrofit tax incentives and rebates, not to mention local incentives. Together with an aggressive attitude from Bank of Canada this makes our real estate stimulus package one of the strongest in the world (especially in comparison to the quite good market situation even before the application of stimulus).

All these points are suggesting the bullish trend of the real estate market. There are a few potential market 'landmines' to avoid. Scotia Capital experts worry especially about the Canadian condo sector. The inventory of unabsorbed newly built condominiums is slowly piling up (they account for about 13% of annualized housing construction activity) and is not just caused by a seasonal trend in the construction industry. Some experts are not very comfortable with CMHC estimated stats for unabsorbed condos and believe there may be rising pressure for a price drop in the condominium sector.

The Canadian market has good potential and should definitely play an important role in portfolios’ of real estate investors. But it will is important to watch the indicators closely, especially in the condo sector. Another question about the bullish or bearish future comes for the federal government. The effect of housing stimulus will fade out sooner or later. Shifting of the future demand to present over time can cause a severe jump in listings later. Therefore these policies should be withdrawn carefully and gently.