Canada – New House vs Resale Housing Divergence
Global Housing report from Scotia Capital (Source):
The slowdown has been most dramatic in Canada. Average home prices in Q2 were up just 6.8% y/y, compared with 16.6% y/y in Q1. Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand. Meanwhile, increased listings are tilting overall market conditions back in favour of buyers. We expect demand to remain at a lower ebb into next year, and prices on average to be roughly flat.
I find this chart very interesting…resale house prices increase ~130% where as new house prices rise only 50% in the last 2 decades… I wonder if this divergence was driven by speculative investment of buying a new house (planned but not built) and flipping it when it is actually built?
…Traditionally, the demand and pricing for new homes mirror, but with a lag, trends in the resale market…
The report points there might be several factors for this divergence in new house prices… here are some factors sighted in the report:
- Tight Supply of resale homes
- Value added from Renovations to resale home (I agree with this one – the quality of new homes in general is not the same even with top of the line upgrades)
- Increased land values in urban centers (new construction tends to be in large suburban lands) because of:
- lifestyle choice
- traffic congestion
- established neighbourhoods
Some more subjective factors I think should be included:
- Resale homes are generally built on bigger lots
- Resale homes older than 10 years are built on wider & less congested streets
- Fewer chances of voyeurism – more space between neighbouring homes
Some other facts:
- Land value accounts for 50% of residential properties.
- Land value has increase by two and a half fold (150%) in the last decade
- The Chart below shows the construction cost of residential building materials