Tight supply signals stronger price gains in Canadian housing

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Canadian real estate is increasingly becoming a seller's market as supply shrinks to decade lows, raising the prospect of rising prices and the re-emergence of froth in some major cities.

New listings in cities such as Toronto, Montreal and Ottawa declined sharply at the end of last year, resulting in the fewest homes available for sale in 12 years, the Canadian Real Estate Association reported Wednesday. As a result, prices are rising nationally at the fastest pace since 2017.

The data suggest the recent housing-market rebound, which had been mostly welcomed after a rough 2018, may now be entering a more perilous phase, particularly after regulators took significant steps to deflate some of the country's most expensive markets. The development hasn’t gone unnoticed among policy makers. Last week, Bank of Canada Gov. Stephen Poloz highlighted the need to keep an eye on the market for any return of speculative activity.

"The current tightness of the market looks real," Doug Porter, chief economist at Bank of Montreal, said in a note. "As a result, we expect some further upward pressure on prices in coming months, and some further upward pressure on household debt to flow from that."

New listings in Canada were down 1.8% in December and are 8% below the 2019 high reached in April, while the sales-to-new listings ratio is the highest since 2004, CREA reported. The ratio for Ottawa hit a record in December, while in Montreal it climbed to the highest since 2003.

Barring an unforeseen change in recent trends, "price gains appear poised to accelerate in 2020," CREA officials said in the statement.

The dwindling supply is boosting prices and curtailing overall transactions. The national benchmark price rose 0.8% in December, climbing for a seventh straight month, a period over which home values have increased almost 5%. Home sales, meanwhile, fell last month for the first time since February, extending a recent slowdown.

Sales in Toronto dropped 3% in December, with new listings in that market down 5.7%.

Even with the recent slowdown, national home sales for all of 2019 rose 6.5% from the previous year, reflecting stronger demand from lower interest rates, a strong labor market and rising population. Still, sales remain well below their 2016 peak.

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