Canadian housing market: are new construction prices stabilizing?

The Canadian real estate market has been extremely active over the last 12 months. Every corner of the market - from Halifax to Vancouver - has been bursting with bidding wars, construction activity, and families moving. By now, we've all heard stories about bids on homes offering hundreds of thousand of dollars over asking. These bidding situations are not limited to the resale market, and even in relatively small housing markets like Halifax, we've seen multiple offers on new construction homes that have yet to be built.

A big question now is: when will prices stabilize, particularly on highly-sought after new construction housing?

NEW HOME PRICE GROWTH TAPERING IN CANADA?

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When it comes to the Canadian housing market, it's difficult to paint it with one brush. Each province regulates their own market and a mosaic of municipalities (creatures of provinces) have their own land use bylaws and socio-economic trends.

However, since about July, the pace of growth in provincial home price statistics for new construction has been slowing for pretty much every province. In Nova Scotia, for instance, new construction price growth peaked in May at 12.84% year-over-year (in August it came in under 10%). In British Columbia, new construction prices peaked at 12.89% in May (in August it was 11.75%). Other provinces have shown less price growth deceleration, but there now appears to be a trend.

Another trend we're seeing is a slowdown in housing sales (transaction) volume across the board, particularly when we break things down by city. Volume growth peaked in June and, since then, we're watching a steep drop in homes trading on the open market. In Edmonton and Montreal, sales volumes in August contracted by more than 10% from the same time the previous year. In Halifax, sales volumes were up 75% in July, but in August they were up just under 22%.

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HOUSING STARTS CONTRACTING, CONSTRUCTION PEAKING?

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The latest round of housing data coming from CMHC indicates somewhat of a slowdown in activity in the new housing sector, overall, as well. Housing starts in August were down 6.2% from the same time last year. That's a major shift from March, when starts were up a massive 68% year-over-year. With housing starts down that much we're starting to wonder if new construction prices have grown to a level where a bulk of buyers are getting priced out.

Growth of housing under construction, too, hasn't moved much since May. That month, housing under construction grew at 13.6%. In August, growth came in around the same level at 13.4%. The number of housing units being built at the moment is staggering, but with housing starts now contracting it's unlikely that we'll see housing under construction return to growth above 14% in the next few months.

But wait, there's more.

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INVENTORY COLLAPSE SLOWS, BUT MORTGAGE CREDIT STILL STRONG?

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As a result of the number of new housing coming online, unabsorbed new construction inventory levels have stopped dropping as precipitously as before. Unabsorbed inventory levels were down over 46% in June, but in August it was down just over 42% - only a slight improvement but a shift in trend.

While it's true that the pace of price growth in new construction appears to be slowing and all the other stuff, it's still premature to say that new housing prices have stabilized for the near term. One of the factors impacting prices - and inventory levels - in the new housing market the most is bank-issued mortgage credit (loans for real estate transactions). As of July, the growth of mortgage credit was still very strong, coming in at 11.74% from the same time last year. In June, it grew by 11.13%. The month-on-month difference may appear small, but it's some of the strongest growth in the data.

We'll need to see credit lose some momentum before we can say for sure that new construction prices have stabilized for the near term.