February 15, 2017 / 2:13 PM / in 6 months

Canada home resales fall but price gains spark 'bubble' fears

File Photo: A real estate for sale sign is pictured in front of a home in Vancouver, British Columbia, Canada, September 22, 2016.Ben Nelms/File Photo

OTTAWA (Reuters) - Resales of Canadian homes fell 1.3 percent in January from December but prices continued to climb in Toronto, the nation's largest market, and have spilled over into nearby cities in what was called a property "bubble."

The Canadian Real Estate Association (CREA) said on Wednesday that home prices were up 15.0 percent in January from a year ago even as sales declined in most markets. Toronto prices soared 22.6 percent despite the introduction last year of tighter mortgage rules.

"Let's drop the pretense. The Toronto housing market - and the many cities surrounding it - are in a housing bubble," Doug Porter, chief economist at BMO Capital Markets, said in a research note.

"Toronto and any city that is remotely within commuting distance are overheating, and perhaps dangerously so. It's a very different story in most of the rest of the country, where conditions are generally calm and under control," he added.

Canada has repeatedly reined in mortgage lending in a bid to cool off housing markets. While most markets have calmed, double-digit price gains in Toronto have helped to buoy the national market and confounded policymakers who see slow growth in much of the rest of the economy.

Official interest rates are near historic lows and rate hikes are not expected anytime soon because of labor market weakness, which means homebuyers still have access to cheap money. Household debt is at record highs.

The housing report showed actual sales, not seasonally adjusted, were up 1.9 percent from January 2016.

CREA said even lower sales may not keep a lid on prices, with low inventory of homes in Toronto and parts of British Columbia helping to drive increases in the biggest markets.

"Unless sales activity drops dramatically, the outlook for home prices remains strong in places that face a continuing supply shortage," Gregory Klump, CREA's chief economist, said in the report.

Prices in Vancouver have receded from their August 2016 peak after a 15 percent foreign buyers tax was levied in the city that month. The tax was imposed after local residents complained that wealthy foreigners, mostly from mainland China, were driving prices out of reach.

Tight supply continues to make it a seller's market, the report showed. The number of newly listed homes fell 6.7 percent in January from December, driving the sales-to-new listings ratio up to 67.7 percent. A ratio between 40 percent and 60 percent is considered a balanced market.

Editing by W Simon, Nick Zieminski and JS Benkoe

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