UPDATE 3-Canada home sales drop in August, forecasts cut

Mon Sep 17, 2012 3:31pm EDT

* Sales down 5.8 pct m/m, 8.9 pct on year

* Declines seen across most of country

* Demand falls following tighter mortgage rules

* CREA lowers forecast for 2012, 2013

By Andrea Hopkins

TORONTO, Sept 17 (Reuters) - Canadian existing home sales suffered their biggest month-over-month decline in more than two years in August, a sign that recent government mortgage rule changes may be hastening the end of the country's post-recession property boom.

The data released on Monday by the Canadian Real Estate Association (CREA) prompted the industry group to cut its sales and price forecasts for this year and next.

"August's sales figures will no doubt provide comfort to policymakers, providing the first clear indication that the recent changes to mortgage regulations aimed at cooling the market are working as intended," Gregory Klump, CREA's chief economist, said in a statement.

CREA said the decline in sales in August was "definitely the result of much of the country moving in the same direction."

Mindful of the U.S. housing market crash that triggered the global financial crisis, Finance Minister Jim Flaherty in June tightened rules on government-backed mortgages for the fourth time in four years. The changes took effect July 9. [ID: nL1E8HLAPP]

The latest CREA data showed sales were down 5.8 percent in August from July. Actual sales for August, not seasonally adjusted, were down 8.9 percent from a year earlier.

The national average price for homes sold in August, also not seasonally adjusted, was C$350,192 ($360,400), up just 0.3 percent from the same month last year.

FORECASTS FALLING

House prices rose by double-digits in some Canadian cities shortly after the financial crisis as record-low interest rates fueled a surge of buying.

"We're pleased there has been some moderation in house prices," Flaherty told reporters in Ottawa on Monday.

Asked if the cooling was linked to the rule changes, he said they were "part of the story".

CREA cut its sales and price forecasts for 2012 and 2013, saying the mortgage rule changes had dampened demand.

The industry group now forecasts sales will rise just 1.9 percent this year and then decline 1.9 percent in 2013. In June, CREA forecast a 3.8 percent jump this year.

It expects sales to fall in all provinces except Alberta and Manitoba, with Ontario registering the largest decline.

Despite its lowered forecasts, CREA sees national sales in 2012 and 2013 remaining roughly on par with the 10-year average, with 2012 coming in slightly above and 2013 slightly below average.

It expects the national average home price to rise just 0.6 percent this year, to C$365,000, and fall 0.1 percent to C$364,500 next year, with Ontario and British Columbia seeing small price declines, while the other provinces see modest gains.

In June, CREA had forecast an average price of C$370,700 this year.

SOFT LANDING SOUGHT

While homeowners may get nervous about a cooling housing market, fearing a U.S.-style price correction that would yank down home equity, most Canadian economists are forecasting a soft landing rather than a crash.

"The Canadian housing market has indeed ratcheted down its growth pace. In fact, in most local markets, it has reversed course with price and sales contractions becoming more the norm," TD Economics Senior Economist Sonya Gulati said in a research note.

"In the absence of a catalyst like an interest rate increase or external economic shock, there really is no reason to think that the housing market will rapidly unravel from the levels currently seen," she said.

Skeptics of this view include David Madani, Canada economist at Capital Economics, who warns prices will decline 25 percent over the next year or two.

"If this withering sales trend continues relative to listings, not least because of tighter mortgage insurance rules and a weakening global economic outlook, then house prices are likely to begin falling by early next year," he said in a note to clients.

Sales declines were reported in about two-thirds of local markets representing 80 percent of national activity in August, with monthly sales drops in almost all large urban centers, including Toronto, Montreal, Vancouver, the Fraser Valley in British Columbia, Calgary, Edmonton and Ottawa.

CREA said a total of 334,208 homes have changed hands over Canadian Multiple Listing Service systems so far this year. That represents a 2.8 percent increase compared with levels reported over the first eight months of 2011 but a narrowing of the 4.5 percent lead for year-to-date sales activity in July.

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