U.S. Housing Market Shows No Relief.
The U.S. housing market recession continues in full swing, with home sales running at least 20% slower than a year earlier, prices posting significant yearover-year declines and the stock of homes for sale holding well above historical norms. Residential investment fell at a 24.6% annual rate in the first quarter after plummeting 25.2% in the fourth quarter of 2007 and subtracted a sizeable 1.1 percentage points from economic growth in the first quarter of 2008.
Foreclosures were up in April and delinquencies are continuing to rise. RBCs forecast assumes that the recession in this sector will continue through 2008. In 2009, the combination of lower interest rates and lower house prices is expected to reduce the inventory of homes for sale to more normal levels, which should put a floor beneath new home construction after three years of significant declines.
The Canadian Housing market is losing its edge but not headed for a crash.
Canada's resale housing market showed signs of slowing early in the second quarter with sales off 1% from the first quarter of 2008 following three consecutive quarterly declines. However, sales continue to run well above the average pace of the past 20 years. While strong demand boosted prices, with gains of at least 10% in the past six years, the pace slowed to 3.2% in April. In contrast, new listings picked up in the first quarter and this trend continued into April, with listings in the major markets up 17.7% compared to a year earlier. Slowing in the housing market was expected and, to some degree, desired because affordability had been increasingly strained through 2007, with most major markets seeing affordability deteriorate to its worst levels since the early 1990s.
On the supply side, the high level of demand continues to support construction activity with housing starts running at an historically fast rate. The structural backdrop to Canada's housing market remains solid, with very limited sub-prime mortgage activity, a relatively small speculative sector and no significant supply overhang despite robust construction activity.
Affordability is also forecast to improve this year, with the Bank of Canada having cut the overnight rate by 150 basis points since last December, mortgage rate spreads showing some signs of narrowing and the pace of house price gains slowing.
Exerpts from Royal Bank of Canada Economic & Financial Market Outlook, July 2008. To read the complete report, visit http://www.rbc.com/economics/market/pdf/fcst.pdf.
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