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. 

It doesn’t look like Scotia Capital has seen the recent house price data… which as I pointed here & here is towards declining prices not 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?

Source: Scotia Capital

…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 

Source: Statistics Canada, Reed Construction Data