In May, existing-home sales in Canada recorded their biggest month-over-month increase in almost four years, according to the Canadian Real Estate Association. The realtor's trade group added that 80% of the local housing markets it regularly tracks posted stronger sales with Calgary, Greater Toronto and Montreal showing the largest gains.

Additionally, national home sales increased 5.9% overall in May from April and the average price of a Canadian home rose 7.1% to $416,584 from the same month last year. Interestingly, if Vancouver and Toronto are eliminated from the calculations, the average home price drops to $336,373 with the year-over-year increase shrinking to 5.3%.

CREA notes that 2014 sales got off to a slow start after a brutal winter, which caused a shortage of listings in many markets and resulted in less than anticipated sales activity. However, the rise in listings in April and May, once the weather improved, created increased buying opportunities.

How does the rest of the year shape up?

CREA expects that interest rates may not rise until the close of 2014 and it forecasts national sales to reach 463,400 units to finish the year. This is 1.2% higher compared to 2013. British Columbia is expected to post an 8.3% year-over-year increase followed by Alberta's 3.8% rise, but sales in Saskatchewan, Manitoba, and Ontario will remain in line with 2013 levels, notes CREA. A 1.7% dip in sales is expected in Quebec, a 4.2% decline is projected in New Brunswick and a 5.1% drop will likely take place in Nova Scotia. Sales in Newfoundland and Labrador sales will decrease by about 2.6%.

Looking out to 2015, CREA suggests the economy, jobs and income levels will continue to improve accompanied by slow and gradual increases in variable and fixed mortgage interest rates. Even though these are opposing factors, CREA expects the housing markets with softer sales and more affordable prices will benefit most. Markets with less affordable prices will tend to be more sensitive to higher mortgage rates, meaning it will be more challenging to make higher payments or to qualify for mortgage financing. Weighing these factors, CREA expects Manitoba, Saskatchewan and Alberta will experience the biggest gains with sales climbing 2.5% to 5%, approximately. Conversely, B.C. and Ontario sales should change very little.

Also, CREA estimates 2015 sales will reach about 467,800 units nationally, up 0.9% from 2014, with the average cost of a home edging up 0.7%to $407,300.

These same Canadian house prices are deemed to be "disarmingly high" according to the International Monetary Fund, which lists Canada close to the top of a list of countries with financially troubling and overvalued housing markets. According to IMF data, house prices in Canada are 33% above their historical average when compared to incomes and 87% above their historical average compared with rents.

The Bank of Canada has also said that because higher housing prices have been offset by lower mortgage interest rates, Canadians are increasingly vulnerable should rates begin to rise and if economic shocks, such as high unemployment materialize.

The BoC recognizes that high household debt-to-asset ratios and debt-service ratios would increase the likelihood of bankruptcy in individuals if their debt burdens become unsustainable because of a jump in interest rates or if their homeowner equity was eliminated by a decline in house prices.

But observers are quick to point out that over the past few years, the Canadian government has initiated several changes to take away some of the housing market's risk by raising the minimum down payment level to five percent and cutting the maximum amortization period from 40 to 25 years.

Others, such as Bank of Montreal economist Robert Kavcic believe that Canada's housing market would be more than able to withstand a modest 2% interest rate increase providing that it is implemented slowly, over one or two years. Kavcic's assumptions, noted in a CBC post, are based on incomes rising by a modest three percent per year over that time, which is reasonable considering the 3.1% pace that Statistics Canada reports.

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