The drop in Canadian home prices in September may not be as severe as it seemed, TD Securities said on Wednesday, bolstering the case that the country is not headed for a U.S.-style housing meltdown.
TD, a unit of Toronto-Dominion Bank, argued in a report that home prices fell 1.3 percent in major Canadian markets in September, not the dramatic 6.2 percent drop that was reported by the Canadian Real Estate Association (CREA) last week.
CREA said the average house price fell to C$315,461 (about $252,000), dragged down by sales declines in Vancouver and Victoria, British Columbia, which offset rebounds in Calgary and Edmonton, Alberta. CREA said the fall came despite year-over-year gains in average home prices in 17 of 25 major Canadian markets.
TD crunched its own numbers and applied a weighting to each major city to fix "compositional shifts", which it said were behind the distorted CREA view. It said the association has acknowledged the problem.
For example, if Vancouver was the only city that reported sales in one month, and the next month Montreal was the only city that reported, then it might seem that prices had fallen in half because Montreal prices are much less expensive than those in Vancouver.
TD fixed the weight of each city to year-earlier sales levels as of September 2007.
"We wanted to get rid of the whole compositional issue. We really just controlled for the allocation. When we did that we ended up with a 1 percent drop instead of a 6 percent drop," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"That's not catastrophically different, but to me that's a number that makes more sense. Yes the housing market is correcting moderately but it does not have the making of a U.S.-style correction."
He said Canadian housing starts may fall below the 200,000 mark, home prices will continue to correct in some inflated cities, but there is no need to brace for big delinquencies or a hard drop in prices.
The TD calculations aren't perfect, Lascelles acknowledged, because they do not eliminate some factors such as type and quality of home in each city.
Canadian housing data has shown signs of softness but nowhere near the slump that hit that United States, stemming from a crisis in the subprime mortgage sector.
Reporting by Ka Yan Ng; Editing by Peter Galloway Reuters Canada
David Pylyp; What an incredible range of opinions are out in the media, yet if you read the headlines only they say the sky is falling. People still need a place to live.
This TD report is a little reflective to specifics in the same fashion that I am, in that I study the sales reported on a daily basis and I have not perceived a viable drop in values. Offers seems to be off modestly by 1 or 2% from the prices of the spring market, so the conclusion could also be a seasonal adjustment. The number of active shoppers has declined and is reflected in the decline in the number of units sold ratios.