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A sunny July, but ominous clouds on the horizon

The July home sales numbers from the Canadian Real Estate Association are offering some encouragement. Sales posted their fifth straight month of increases, up 3.5% from June and up 12.6% from a year ago. They are up 15% from the six-year low posted in February.

The national average price for housing (all types) rose 0.6% in July, compared to June – the biggest increase in two years. Compared to a year ago prices are up 3.9%, but there are big variations across the country. The Toronto and Vancouver area markets continue to skew prices higher. The national average of $499,000 drops to $393,000 when they are taken out of the calculation.

CREA credits falling interest rates for the increases and points out that some markets are finally shaking off the effects of the B20 mortgage rules, which it still sees as a significant barrier to ownership.

But an interesting report by well-known economist Doug Porter warns that home prices could start rising at “nosebleed levels” again, creating a serious risk for the Canadian economy. Porter cautions that falling interest rates could fire soaring price leaps and trigger another round of speculation which would, in turn, drive prices even higher.

Such a development would scuttle government efforts to re-establish affordability. And because speculators tend to leave their properties vacant while flipping them, available housing stock would suffer, driving up demand and further increasing prices.

It is an ugly cycle that we have seen before.