Homeowners’ replacement cost index sees biggest yearly gain since February 2007
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New home prices are climbing higher alongside those of existing residential properties, yet another indication of the kind of frenzied activity that has recently been taking place in Canada’s red-hot housing market.
In announcing Consumer Price Index figures on Wednesday, Statistics Canada reported the homeowners’ replacement cost index, which is tied to the price of new homes, rose seven per cent year-over-year in February.
It was the biggest yearly gain since February 2007, StatsCan said, “as higher building costs, low interest rates and strong demand for homes with more space continued to push prices for new housing higher.”
The gains for the replacement index have been steadily growing over the past year, from a 0.1 per cent year-over-year increase in February 2020, to two per cent last August, to 5.8 per cent in January.
Furthermore, the latest rise for the replacement index follows StatsCan reporting that the price for new housing was up 5.4 per cent in January compared to a year earlier, which was the largest increase since March 2008. It also comes after the Canadian Real Estate Association announced national home sales set another all-time record in February, with the actual average price rising 25 per cent on a year-over-year basis.
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“We can point to things like rising lumber prices and whatnot, but the reality is if you didn’t have a strong resale market, then new home prices wouldn’t be doing anything like this,” Bank of Montreal chief economist Doug Porter said in an interview.
The latest figures are also further proof of intense demand in Canada’s housing market that has yet to show any sign of dying down, whether it is for new or existing residential real estate. Driving it are low mortgage rates, increased household savings and a COVID-19-driven desire for more room.
“Moreover, a ‘fear of missing out’ is likely influencing many markets and could lead to exuberance in some places,” predicted Alberta Central chief economist Charles St-Arnaud in a report earlier this week. “These factors are likely to continue to support the housing market for some time.”
Policymakers have started to take note of the situation, particularly the Bank of Canada. Mortgage rates have also begun ticking up lately in line with rising bond yields, which might begin to weigh on demand for housing.
Still, Statistics Canada reported on Wednesday that its mortgage interest cost index dropped 5.4 per cent year-over-year in February, which followed a decline of 4.3 per cent in January, as Canadians locked in loan rates at historically low levels. StatsCan added that rent prices across Canada were up 0.1 per cent in February.
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“Falling mortgage interest costs were again more than offset by higher homeowners’ replacement costs, which have been rising alongside home prices,” Canadian Imperial Bank of Commerce economist Royce Mendes wrote in a note to clients. “That dynamic should continue as house prices have continued to advance even as interest rates (have) begun to rise.”
Mortgage-related price pressures could start to ratchet up again as rates rise, although it may not cause an immediate surge in StatsCan’s index. After all, not everyone is renewing or taking out a mortgage at the exact same time.
“This is something that doesn’t necessarily turn quickly, but I suspect we’re very close to seeing the lows on this and that it’s likely to head higher in coming months,” BMO’s Porter said.
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