September 12, 2013 / 12:36 PM / 5 years ago

Canada housing prices bounce higher but no crash seen

OTTAWA (Reuters) - Canadian housing prices climbed to a record high in August, according to a price index released on Thursday that suggested the property market, long the country’s biggest engine of economic growth, remains strong but not frothy.

A builder works on the the roof of a new home under construction in the Montreal suburb of Brossard August 10, 2010. REUTERS/Shaun Best

Home prices rose in August from what was already a record high in July, but the annual price increase remained subdued, the Teranet-National Bank Composite House Price Index showed.

The index, which measures price changes for repeat sales of single-family homes, showed prices rose 0.6 percent in August from a month earlier, below the seasonal norm.

Prices rose just 2.3 percent from a year earlier, a slight acceleration from July. The annualized gains for the last five months have been the smallest since November 2009, and well below the U.S. equivalent, which was up 12 percent in June.

“The demographics and the low interest rates at the moment are supportive of the market,” said Marc Pinsonneault, senior economist at National Bank Financial.

Toronto and Calgary, Canada’s oil capital, led the way for price hikes. But prices dropped in five of the 11 markets surveyed across the country, which Pinsonneault said was hardly evidence of overheating.

“We don’t see the market having a collapse similar to the one they had in the U.S.,” he said.

The housing market has been a focal point for Canadian policymakers since a boom that followed the 2008-09 recession. A prolonged period of low borrowing costs and rising house prices led to record-high household debt and rising fears of a property bubble that could pop and give way to a financial disruption.

In response, the government tightened mortgage lending rules four times, and after the latest intervention, in July 2012, the property market cooled markedly. The market bounced back this spring and has since appeared to stabilize.

But housing is still seen as overvalued in some areas, spurring the question of whether any downturn will be sudden or gradual. Most economists at Canada’s major banks see the market staying stable in the medium term.

Separately, Statistics Canada said on Thursday its new housing price index climbed 0.2 percent in July from June, beating market expectations of a 0.1 percent gain and bringing the year-on-year increase to 1.9 percent.

Calgary saw the biggest 12-month jump in new home prices, 5.8 percent, since December 2007. In Toronto-Oshawa, prices rose 0.3 percent on the month and 2.6 percent on the year.

Prices rose in 10 cities, fell in six and were unchanged in five.

The new housing price index excludes condominiums, which the government has said are a particular cause for concern because of overbuilding, especially in Toronto.

The aggressive rebound in home prices has been accompanied by a recovery in existing home sales.

All told, the impact of Ottawa’s crackdown on mortgages rules has faded, said Mazen Issa, economist at TD Securities.

Still, mortgage rates have begun to rise, likely dampening home purchases.

“We do not see a strong case for rampant home price appreciation over the medium-term as the backup in mortgage rates will erode affordability,” Issa said.

“Moreover, sales activity is likely to slow as household balance sheets are stretched and the increase in home prices may have priced-out potential home buyers,” he said.

Additional reporting by Alastair Sharp in Toronto; Editing by Peter Galloway

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