The Canadian existing home market took a step back in December, but activity remains at high levels

Existing home sales fell 0.6% m/m in December, but were still up 10% relative to a year ago. Despite the tick down in December sales hit a record high in the fourth quarter overall. 

While buyers in Ontario and B.C. continue to face a relatively tight market, listings are rising across most other major markets. Overall listings rose 2.2% in December following a sharp 3.3% gain in the prior month, finishing the year at the highest level in over 6 months. As such, the sales-to-listings ratio edged down to 55.5 in December - representing a balanced market according to CREA's 40-60 range definition. Importantly, listings are rising the fastest in the cities facing significant economic uncertainty, including Calgary, Edmonton, Winnipeg and Saskatoon.

Average existing home prices were up 12% year-over-year, or 7.3% on a quality adjusted basis. While the weakness in December sales was fairly broad based (with the exception of Montreal and Quebec City), price pressures were once again concentrated in a few markets. When you strip away Toronto and Vancouver, average home prices were up 5.4%, but even that figure was mostly bolstered by other markets in the provinces of Ontario (like Hamilton and Guelph) and B.C. (Victoria).

Overall, 2015 was a banner year for overall existing home sales, but some of that momentum will likely ease in 2016. Looking ahead, sales activity may spike in January, as buyers attempt to get into the market ahead of higher down payment requirements for insured mortgages, scheduled to take effect mid-February.  However, beyond this near-term boost, fundamentals underpinning the strength in housing activity are starting to wane. 

Most importantly, modestly higher mortgage rates are likely to take some steam out Ontario and B.C., where markets have likely become more sensitive to small changes in interest rates than they have been in the past. Meanwhile, rising economic uncertainty and the 'lower for longer' mantra for oil prices are likely to continue to take a toll on housing markets in economies heavily tied to the oil business, such as Alberta and Saskatchewan.

Canadian average existing home price growth is expected to cool to a more modest 2% pace by next year, with Toronto prices still rising at a decent 4% rate and Vancouver topping the growth charts at 6.5% year over year. On the other hand, Calgary home prices appear on track for a 10% peak-to-trough decline over 2016.

"There are upside risks to that view in light of the likelihood of another rate cut by the Bank of Canada next week, which will likely offset the negative impact of changes to mortgage regulation in the most overheated markets. The strength of this offset will depend on the degree to which mortgage rates follow the Bank of Canada policy rate down, something that remains uncertain at this point", says TD Economics.