CANADIAN HOUSING: FIRST IN, FIRST OUT

BUT WHERE TO FROM HERE?

Existing home sales and prices, as provided by the Canadian Real Estate Association
(CREA), went through a sharp downturn last year, falling by 40% and
12% respectively from their peak of late 2007. Just as quickly and sharply, a phenomenal rebound kicked off early this year and was still going strong early in the
fourth quarter. From their trough sales had surged by 74% as of October, while the
average price was 20% higher.

In this extremely sharp two-year cycle, the housing market has undeniably
held up to its ‘fi rst-in, fi rst out’ (FIFO) historical billing. The downturn in existing home sales and prices (Q1/2008) preceded the start of the technical recession(dated Q4/2008) by three quarters. On the fl ip side, the strong recovery in existing home sales and prices that started in earnest in Q1/2009 led the end of the technical recession (dated Q3/2009) and the start of the overall economic recovery by at least two quarters.

Furthermore, the Canadian resale housing market downturn and recovery was
as V-shaped as can be. A quick glance at the chart at the top of the next page shows
sales and the average price could make a calligrapher green with envy. The length of
each leg of this cycle was also nearly symmetric with the downturn lasting roughly
all of 2008 and the ensuing recovery spanning all of this year.

While in the thick of a recession, the strongest countervailing force that set the
stage for the mother of all rebounds, apart from lower prices, was lower interest
rates. Recall that the Bank of Canada began easing its monetary policy back in late
2007, when it was becoming clear that the U.S. economy was tilting into recession
and would surely drag Canada along with it.

By the time the recession offi cially hit in Canada a full year later, the overnight rate had already been slashed from 4.50% to 2.25%, more than halfway en route to its all-time low of 0.25% by April 2009.

All said, the housing market has gone beyond retracing its steps and fully
recovering from the end of 2007 – which had marked the peak of a half-decade
long boom, concentrated in Western Canada. As of October 2009, national sales
were running at a blistering 550K annual pace and the average price was $340K.

1. See “Real estate trends could impact future path of Canadian monetary policy”, October 6th 2009,
at
http://www.td.com/economics/special/ca1009_housing.pdf and resale housing outlook,

“Housing
markets rebound sharply, sidestepping the worst”,

October 7th 2009, at http://www.td.com/
economics/special/pg1009_rhousing.pdf