Canada’s housing market is showing signs of emerging from its winter hibernation, according to the latest Real Estate Trends report released Tuesday by Scotia Economics.

Nationally, home sales strengthened in both February and March, and preliminary reports suggest this firming trend continued in April.

The report notes that the rise in demand, combined with fewer new listings, has restored a better balance to the market. The national new-listings-to-sales ratio averaged 2.2 in March, down from a cycle peak of 2.7 last November (about 2.0 is considered balanced). Average home prices steadied in February and March, though were still down almost 8% year-over-year, or 5% on a regional sales-weighted basis.

“These ‘green shoots’ are encouraging,” says Adrienne Warren, senior economist and real estate market specialist, Scotia Economics. “On an annualized basis, average home prices in early 2009 are running about 6% below last year’s levels, while sales volumes are down 16%. This is tracking a slightly better performance than our forecast for a 10% decline in average prices this year, and at the low end of our forecast for a 15% to 20% drop in sales.

“Nonetheless, we still feel there is more downside than upside risk to home sales and prices,” adds Warren. “The significant deterioration in domestic labour markets in recent months suggests little prospect for a major resurgence in demand near-term. Meanwhile, a still high level of active listings relative to underlying demand will continue to pressure prices.”

The report states that in contrast to the pickup in home sales, residential construction is being reined in even faster than anticipated, with builders quick to respond to falling new home prices, rising inventories and greater resale competition. Housing starts slumped to a decade-low of only 139,000 annualized units in the first quarter. Residential permit demand has slipped even further to around the 125,000 unit mark.

“While exacting a heavy toll on domestic demand and employment, the correction is nonetheless a necessary cyclical adjustment to an extended period of overbuilding,” says Warren. “We now expect Canadian housing starts to total only 140,000 units this year, down from our February forecast of 155,000. The longer-term sustainable rate of housing starts, taking into account population growth and depreciating stock, is around 175,000 units annually.”

As for Canada’s condo market, the report notes that the supply of new condo units coming onto the market is now outpacing demand, pointing to downward pressure on prices in the year ahead. However, the risk of developing a late-1980s-type glut, and an ensuing broad reversal in prices, still appears low.

The report highlights a number of factors that should help to contain unsold condominium inventory, including sharply lower multi-unit starts, falling permit demand, tighter financing requirements for developers, low rental vacancy rates and improving first-time buyer interest.

IE