Source: Scotiabank Group

Canada’s housing market is showing signs of emerging from its winter hibernation. The Canadian Real Estate Association reported a healthy pickup in home sales nationally in both February and March, beyond the typical seasonal bump, albeit off decade lows in January. Preliminary reports suggest this firming trend continued in April. Buyers, especially firsttime, are being lured by historically low mortgage rates, greater affordability and increased supply.

The rise in demand, combined with fewer new listings, has restored a better balance to the market. The national new-listingsto-sales ratio averaged 2.2 in March, down from a cycle peak of 2.7 last November (about 2.0 is considered balanced). Average home prices steadied in February and March, though were still down almost 8% year-over-year (or 5% on a regional salesweighted basis).

These ‘green shoots’ are encouraging. On an annualized basis, average home prices in early 2009 are running about 6% below last year’s levels, while sales volumes are down 16%. This is tracking a slightly better performance than our forecast for a 10% decline in average prices this year, and at the low end of our forecast for a 15-20% drop in sales.

Nonetheless, we still feel there is more downside than upside risk to home sales and prices. The significant deterioration in domestic labour markets in recent months suggests little prospect for a major resurgence in demand near-term. Meanwhile, a still-high level of active listings relative to underlying demand will continue to pressure prices. In contrast to the pickup in home sales, residential construction is being reined in even faster than anticipated, with builders quick to respond to falling new home prices, rising inventories and greater resale competition. Housing starts slumped to a decade-low of only 139,000 annualized units in Q1. Residential permit demand has slipped even further to around the 125,000 unit mark.

While exacting a heavy toll on domestic demand and employment, the correction is nonetheless a necessary cyclical adjustment to an extended period of overbuilding. We now expect Canadian housing starts to total only 140,000 units this year, down from our February forecast of 155,000. The longer-term sustainable rate of housing starts, taking into account population growth and depreciating stock, is around 175,000 units annually.

For the full report from Scotiabank click here