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Canadian home price divergence likely to continue in 2016

Canada's housing market resembled a roller coaster ride for much of 2015, as prices soared in Vancouver and Toronto and dropped in the oil-sensitive Prairies. Several new indicators this week are set to offer a glimpse into whether the drama will continue in 2016.

Among the bounty of housing statistics due this week: Teranet-National Bank House Price Index will report on the national resale market for January, while Statistics Canada offers up building permits for December, along with its new-home price index for that month. Meanwhile, the country's largest alternative mortgage lender, Home Capital Group Inc., will reveal its fourth-quarter earnings.

Early signs suggest that 2016 is shaping up to look a lot like last year, including an even more pronounced divergence between the sizzling regions of Vancouver and Toronto and cooling markets in Alberta.

Canada Mortgage and Housing Corp. accidentally released its data on January housing starts a day early on Friday, showing a slowdown in new home construction in all regions except Ontario. In Alberta, housing starts plunged to the lowest level since 2011.

"The precipitous drop in Alberta building activity now appears to be reflecting much weaker demand conditions in the province," wrote Bank of Montreal economist Robert Kavcic. He expects overall housing starts to remain at levels similar to last year, but "with demand moving briskly away from oil-producing regions."

The Calgary Real Estate Board said its benchmark home price fell by 3.27 per cent in January from a year earlier, including a 1.21-per-cent drop from December. The condo market bore the brunt of the January freeze, with the benchmark price sliding more than 6 per cent from a year earlier to $281,900.

Overall home resales activity fell 13 per cent from last January and was 43 per cent below the city's long-term average as homeowners began to lose hope that the market would rebound soon.

Mortgage insurer Genworth MI Canada Inc. is already seeing more Albertans struggling to pay their mortgages and warned of greater housing woes for the province in the year ahead. "I would expect to now start seeing a gradual build in delinquencies out of Alberta given where unemployment is and given the fact that most of the measures that delayed [a housing downturn] last year were really time-bound," Genworth chief executive officer Stuart Levings told analysts on Friday. "They can only go on for so long."

Meanwhile in Greater Vancouver, the benchmark price for a detached home skyrocketed an annualized 28 per cent to $1.3-million last month.

Some of the sharpest price growth came from the suburbs. Benchmark resale prices soared an annualized 37 per cent in Burnaby East and now average more than $1-million. The region's condo market is also feeling the heat, with prices rising an annualized 20 per cent to $456,600.

Vancouver's market was almost the mirror opposite of Calgary's in January, with resale activity running 46 per cent above the city's long-term average, even as the number of available listings fell 38 per cent from a year earlier.

Analysts had expected the eye-popping price growth to spark new home construction in the province. But so far it hasn't happened. British Columbia housing starts dropped nearly 6 per cent in January from a month earlier. "Depressed construction activity will likely keep home price gains lofty in B.C. yet again in 2016," Toronto-Dominion Bank economist Diana Petramala wrote.

The B.C. government has come under increasing pressure to address an affordability crisis in the Lower Mainland. Provincial Finance Minister Mike de Jong has said the government's budget, due Feb. 16, will include relief for home buyers and measures to encourage more new home construction.

In the Greater Toronto Area, the benchmark home price rose an annualized 11.2 per cent last month, driven by strong sales of more expensive detached homes. The average price surged more than 20 per cent in the suburbs around Toronto, while resale activity was up more than 8 per cent from a year earlier. Sharply rising prices prompted Canada Mortgage and Housing Corp. to renew its warnings about the risks facing Toronto's overheated housing market.

Another strong showing for the housing markets of Toronto and Vancouver last month has done little to silence the housing bears.

Skittish investors have penalized lenders that are more sensitive to the housing market, including those that have relatively little exposure to mortgages in Alberta. The share prices of non-bank mortgage companies, such as Home Capital, Equitable Finance Inc. and MCAN Mortgage Corp., have fallen an average of 20 per cent since a year ago, compared with a 9-per-cent drop in the share price of the major Canadian banks, Industrial Alliance analyst Dylan Steuart noted.

"While general credit performance for domestic lenders has been extremely positive to date, there is a general expectation that 2016 will see an increase in delinquencies and credit provision from historic lows," he wrote in a research note.

Some analysts predict that January's housing strength will prove to be an anomaly that was driven by buyers in more expensive cities rushing into the market ahead of increases to minimum down payments on more expensive insured mortgages, which take effect on Feb. 15.

"Even if the impact of pending mortgage rule changes is ultimately going to be small, the mere perception in the market that minimum down payments are going up next month is probably pulling forward some sales," Bank of Montreal economist Robert Kavcic wrote.

The tougher mortgage rules come at a time when confidence in the economy is waning among heavily indebted consumers as oil prices show no signs of a sustained recovery. Last month, the Conference Board of Canada said its consumer confidence index fell to its lowest level since 2011.

Household debt hit $1.91-trillion in December, up 5.2 per cent from a year earlier. It was the fastest pace of growth since 2011, outstripping growth in household incomes, wrote Royal Bank of Canada economist Laura Cooper. Most of the new debt came from mortgages, which grew by $79-billion last year, or 6.2 per cent from a year earlier.

Few expect consumers to be able to churn out another year of strong borrowing. "Consumer spending and housing activity across the country will add much less to overall growth in an environment of increasing consumer caution that is being reinforced by moderating employment gains, reduced pent-up demand for big-ticket items because of record home and car ownership rates, and rising household debt burdens," Bank of Nova Scotia economist Aron Gempel wrote.

This week may also bring more clarity to how the Bank of Canada views the increasingly uncertain outlook for the country's housing market. The central bank's deputy governor Timothy Lane is scheduled to give a speech Monday in Montreal on the topic of monetary policy and financial stability.

"Clearly an issue that strikes to the heart of domestic financial stability issues and the role of the central bank is the extent to which easy money policy has inflated house prices from coast to coast," Scotiabank's Derek Holt wrote. , "while macroprudential rules have been unsuccessful in materially cooling housing markets."

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