TD scales back house-price decline

Canadian housing prices have not fallen nearly as steeply as conventional measures indicate, Toronto-Dominion Bank said Thursday.

According to a new TD Home Price Index, which the bank unveiled Thursday, average major market home prices in October were down just 4.6 per cent from a year earlier, rather than the 10.9 per cent cited in a news release Nov. 14 by the Canadian Real Estate Association (CREA). The difference stems from the fact that while CREA has traditionally weighted its average price figure based on relative sales volumes, TD is weighting it based on the outstanding stock of homes in a given region. The bank acknowledged, however, that CREA recently began using a "more accurate stock-weighted method."

In fact, in its Nov. 14 news release, the association also said that using a stock-based calculation, the weighted national average price "eased by 5 per cent" in October, year-over-year. However, this number appears to have received little media attention.

Bob Linney, a spokesman for the Ottawa-based association, said CREA chief economist Gregory Klump developed the methodology and has been using it for two months.

The difficulty with the more traditional sales-weighted approach is that it measures the average price for existing-house transactions in a given month and market, regardless of unit type, quality or size, TD said in a report to clients Thursday.

"In normal times, these regional sales-weighted price measures are reliable," TD economists Pascal Gauthier and Grant Bishop said in the report. "However, the same cannot be said when markets are at a turning point and sales fluctuate significantly. Such is the case in Canada at the moment."

The economists cited the British Columbia market, where sales were down by 40 per cent as at Oct. 8. "Since average prices in [B.C.] are the highest in the nation, the drop in sales tends to overstate the extent of price declines when applied to a simple national average," they said.

Indexes that are weighted on the basis of the stock of housing in a given region, such as the S&P/Case-Shiller Housing Price Index in the United States offer a "better apples-to-apples comparison over time" because they focus on houses that have sold more than once," the TD economists said.

CREA's Mr. Linney agreed. "It's like seasonally adjusting, it eliminates the highs and the lows," he said in a telephone interview. "We had one month where the average price [in Halifax] almost doubled, but it was because they sold three $1-million houses, which doesn't normally happen."

TD released its report the same day as Bank of Nova Scotia joined a growing crowd of observers in declaring that Canada's longest housing boom since the end of the Second World War has ended.

However, there is little or no danger that Canada will experience the sort of market collapse and tidal wave of foreclosures occurring south of the border, Scotiabank senior economist and real estate specialist Adrienne Warren said in a report.

"This is not a U.S.-style bust caused by overbuilding, speculative buying and imprudent lending, but rather a cyclical slowdown accompanied by a valuation adjustment in several large centres where booming demand conditions and temporary supply constraints led to an overshooting in prices," she said.

The reversal of fortune has been most pronounced in what have been Canada's hottest markets of late, it added - the Western provinces and, in particular, Calgary, Edmonton and Vancouver.

The flip side, however, is that in virtually all regions of the country, "conditions ... are tilting back in favour of buyers for the first time in years," the bank said.

The Scotiabank report comes a week after CREA disclosed that, in October, the national average price of a resale home fell by 10 per cent from a year earlier to $281,133, the fifth consecutive monthly decline and the largest in percentage terms since August, 1982. As well, unit sales were down a full 27 per cent from a year earlier.

Earlier this week, meanwhile, a survey by the Canadian Association of Accredited Mortgage Professionals found that 35 per cent of Canadians now expect housing prices to continue falling, up from 15 per cent last spring.

Scotiabank is, in fact, a little late to the party. Economists at Bank of Montreal, for example, declared as early as last March that Canada's housing boom was dead.

As of August, U.S. housing prices were down 20 per cent from their peak in July 2006, Ms. Warren said in a telephone interview, and given there is so much unsold inventory, "we see further declines of maybe 25 per cent plus."

By contrast, she figures that the correction in national average housing prices in Canada will probably be in the range of 10 per cent to 15 per cent, "well below the ongoing U.S. retrenchment."

As evidence of why the Canadian housing market is not at risk of the same sort of bust occurring in the United States, Ms. Warren cited the fact that Canada's inventory of unsold new and resale homes is still "well contained compared with prior cycles," even though it is moving up.

For another, there is a low risk of widespread foreclosures and, combined with the fact that builders are generally starting to slow the pace of new construction, this means Canada does not have to cope with the "massive inventory glut underlying record-setting U.S. price declines."

Canada's situation compares favourably with that of several other nations, according to the Scotiabank report.

Measured by a valuation model developed by the International Monetary Fund, Canada's housing market is "least overvalued," while Ireland's and Britain's are the most overvalued, the report said, followed by Australia, France and Spain.

"U.S. house prices are estimated to be only moderately overvalued following the recent price declines," it said.