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Fairy tale ‘soft landing’ menaced by housing oversupply

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For those adopting the moniker of "Goldilocks" to describe Canada's surprisingly resilient housing market – as in, "not too hot, not too cold" – it's worth remembering that fairy tales don't always have happy endings. In one of the earliest versions of "The Three Bears," in fact, the human protagonist ends up impaled on the steeple of St. Paul's Cathedral. (Sleep on that, kids.)

Yes, it's all fine and good – particularly for Canada's slow-growth economy – that the all-important housing sector is keeping its head above water, against many odds and bearish (pun sort-of intended) forecasts. Data released Thursday by the Canadian Real Estate Association showed continued modest growth in both home resales and prices in July; Canada Mortgage and Housing Corp. issued their own figures and analysis, suggesting that the country's relatively modest housing slowdown has generally stabilized and will turn upward heading into 2014. Both reports add further evidence to the argument that Canada's housing sector may have pulled off that most elusive of economic events: The soft landing.

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Like many nice stories, this one may be too good to be true. Resilient or not, this is still an oversupplied market. The pullback in housing activity earlier this year did very little to correct that – before home construction bounced back to a pace far above the rate of new-household creation.

The country's inventory of unsold new homes has eased from its highs, but is still running at historically elevated levels of nearly 10 months' supply for single-family dwellings, and more than 12 months for condos. Housing starts, at an average annualized rate of 196,000 units, is outpacing typical annual household creation by roughly 25,000. Toronto-Dominion Bank economist Dina Ignjatovic said in a recent research note that an estimated oversupply of 250,000 new homes – more than a year's worth of construction – is expected to hit the market over the next 18 to 24 months. The market may have crept a bit closer to balance thanks to its slowdown of late 2012 and early 2013, but it's destined to be swimming in supply if it maintains anything close to its current pace.

Continued low interest rates have sustained a pace of buying in the housing market, for both residential and investment purposes, that would otherwise be unsustainable . That will become very difficult indeed to justify once rates start to creep upward, likely within the next year to 18 months. So, the ample supplies will be met with declining demand. This is no recipe for strong sales or continued price appreciation.

That's not to say that a spike-impaling event is inevitable. But we're nowhere near the end of this story – and happily-ever-after still doesn't look like the most likely outcome.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More


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