Housing Market In The Beggining Of 2010

Accelerated activity in the housing market is part of the natural flow of economic recovery, according to the Bank of Canada and housing economists working to deflate theories about a new housing bubble that could drive the Canadian economy back into recession.

The Bank of Canada indicated it was premature to be talking about a housing bubble in Canada in a speech delivered Monday by bank official David Wolf. His remarks came after months of highlighting the danger of Canadians getting in over their heads in purchasing homes.

"Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals," Wolf said. "We see the housing market requiring vigilance, not alarm."

Wolf said the bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.

Moreover, he noted that with starts below long-term demographic requirements, the number of houses on the market is still declining.

The Canadian Real Estate Association reports housing prices increased about 4.4 per cent over the first 11 months of 2009, and predicts a further increase of 4.7 per cent in 2010.

The association's chief economist, Gregory Klump, said the year-over-year increase has been "turbocharged" by a combination of today's strong market and the weak year-ago market, which skews average prices.

He added that the current increase is part of natural real estate cycle.

"One would expect that when the worst of a recession is behind us and we've got emergency low interest rates, that would draw buyers back to the market," he said. "A lot of the supply that moved to the sidelines is coming back to the market and is expected to continue to come back, making for a balanced market and smaller price increases going forward."

Bank of Canada governor Mark Carney has warned for months that Canadians are amassing too much consumer and mortgage debt and that could be a problem for the broader economic recovery if rates rise and debt payments begin to increase for millions of Canadian households.

The Bank of Canada has said interest rates will probably rise after the middle of the year as the economic recovery takes hold and the impact of stimulus spending creates potential inflationary pressures in the economy. However, Monday's comments suggest the central bank won't push rates higher just to cool the housing market.

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Prepare For Higher Mortgage Rates

The Canadian housing market has seen a stronger and faster rebound from the recession than any other segment of the economy, due in large part to enticingly low mortgage rates.

But rates this low - 5.59 per cent for a five-year fixed-rate mortgage and 2.25 per cent for a five-year variable-rate mortgage at one bank - can't last forever, and experts are advising borrowers to prepare for higher rates within the next 12 months.

"We have to realize those are emergency interest rates," said CIBC economist Benjamin Tal.

"Interest rates will rise - it's just a question of time, it's not a question of if. And if that's the case, we have to make sure that when we borrow this money we can afford the same mortgage 200 or 300 basis points higher. That's the key responsibility now of borrowers and lenders, to make sure that what we do, we do it in a prudent way."

Depending on whether they are fixed or floating-rate, mortgages are tied to either the bond market or the Bank of Canada's key lending rate, which are closely related. The central bank's rate has been sitting at a record low of 0.25 per cent since the spring and it has said it will keep it steady until at least next June to help stimulate the ailing economy.

On Wednesday, three of Canada's biggest banks - Royal Bank (TSX:RY), Bank of Montreal (TSX:BMO) and TD Bank (TSX:TD) - announced that they will cut posted rates for fixed-rate mortgages by up to 0.25 percentage points. On Thursday, CIBC (TSX:CM), Laurentian Bank (TSX:LB) and Scotiabank (TSX:BNS) followed suit by cutting their five-year mortgages by 0.25 per cent to 5.59 per cent, in the case of CIBC and Scotiabank, and 5.6 per cent at Laurentian.

But mortgage lenders agree that rates are nearing the bottom and will begin to rise again in 2010.

"The only sort of assurance that you hear in the marketplace is the Bank of Canada's going to try to maintain that rate until June. But past that, there are already warnings that if there need to be adjustments, the adjustments could be a little more abrupt than we've been used to in the past," said Martin Beaudry, vice-president of retail lending at ING Direct.

CIBC's Tal said that with rates this low, "it's almost a crime not to take a mortgage out," but warned that consumers need to be prepared for higher interest rates later on and what this could mean for their personal finances.

For example, a $200,000 mortgage with a term of 25 years and an interest rate of 2.25 per cent has monthly payments of $876.26. For the same mortgage with an interest rate of five per cent, the monthly payments become $1,169.18.

And this doesn't only apply to variable-rate mortgages, but to fixed-rate mortgages that are coming up for renewal, Tal said.

"It's not just variable rates, because five years from now the rates will be much higher, so you don't want to find yourself in a situation five years from now where you can't afford the house," he said.

"It's important to be extremely prudent and not to be totally blinded by those rates."

Mortgage-Rate Rush

Real estate prices rose again in August and were approaching their levels of a year ago, numbers released Wednesday by the Greater Vancouver and Fraser Valley real estate boards showed.

Market watchers, surprised by the strength of the rebound, said it appeared buyers were cashing in on record-low mortgage rates while they last.

Sales set records in July and stayed hot in August. The question now is whether the market can keep up the pace.

“Before I would call this a complete recovery I would want to see a couple of months of data,” Robyn Adamache, a market analyst with Canada Mortgage and Housing Corp. said in an interview.

Adamache added that there now are five months worth of data showing an upward trend, but “it remains to be seen whether this was just a one-shot deal where everybody was pre-approved for their [low-rate] mortgages and they basically jumped into the market, and whether or not [the market] can be sustained for the rest of the year.”

However, Adamache said on balance, Metro Vancouver’s average property prices, since their trough last March, have climbed back to within three percentage points of their peak.

She estimated that from peak to trough, average prices fell some 15 per cent.

Record-low mortgage rates, which fell as low as 3.65 per cent on five-year fixed-rate mortgages before rising again after June 1, played a big role in the market.

“If I had to put [market performance] on one thing, I would have to say interest rates,” Carolyn Heaney, Vancouver area manager of mortgage development for the Bank of Montreal, said in an interview.

Heaney said her mortgage lenders had a lot of clients who had been approved for mortgages with the low rates, and had 90 days to buy homes and close their purchases before their pre-approvals expired.

“There were certainly a lot of people who jumped off the fence in order to keep their rates,” she said.

Kevin Lutz, B.C. mortgage manager for RBC Financial Group, said that despite the recession, a bit of consumer confidence has been returning to the market. Lutz said the past few months have seen buyers cram almost a year’s worth of buying activity into a short period.

In the area of Metro Vancouver covered by the Real Estate Board of Greater Vancouver (REBGV), that translated into 3,441 sales through the Multiple Listing service, a 120-per-cent increase from last August, when the region saw 1,568 sales.

Prices in Metro continued to edge up with the benchmark price (the average price of the typical property sold) for detached homes hitting $732,656 in August. That was just 0.7 per cent below last year’s benchmark price for detached homes.

Some communities saw detached-home prices rise above their levels of a year ago. On Vancouver’s west side, for example, the benchmark of $1.4 million in August was three per cent higher than in the same month a year ago.

The $685,746 benchmark for detached homes on Vancouver’s east side was 3.2 per cent higher than a year ago.

New Westminster, Pitt Meadows and the Sunshine Coast also saw detached home prices higher than a year ago.

“It has been surprising,” REBGV president-elect Jake Moldown said. “I don’t think if you had talked to any of us in January that we would be expecting sales levels to be where they are today.”

However, he said with price adjustments and low interest rates combining to reduce mortgage payments, a lot of first-time buyers have jumped into the market, helping set off a chain reaction of upward movement.

In the Fraser Valley, realtors recorded their second busiest August on record, with agents racking up 1,786 sales through the MLS in August, up 96 per cent from 910 sales in the same month a year ago, when the market was sliding rapidly.

For the period of June through August, the board said valley realtors saw 5,857 MLS sales, which outpaced the same period of 2007, but is still far from matching 2005’s 6,866 sales for June, July and August.

Fraser Valley realtors saw the benchmark price (the average price of a typical property sold) for single-family homes creep up 3.8 per cent over the past three months to $483,839 in August, not quite erasing the losses of the past year. That price was still 3.5 per cent below last August’s $501,317 benchmark.

Canada housing starts post strong increase

Canadian housing starts rose an unexpectedly strong 13.7 per cent in March, breaking a six-month losing streak thanks to renewed strength in Ontario and Quebec, Canada Mortgage and Housing Corp said Wednesday.

Ground breaking on new homes climbed to a seasonally adjusted annualized rate of 154,700 units from an upwardly revised 136,100 units in February, CMHC said.

Analysts had predicted 130,000 starts in March.

The Canadian dollar strengthened on the data and by 8:25 a.m. was at $1.2331 to the U.S. dollar, or 81.10 U.S. cents, compared to $1.2378, or 80.78 cents, at Tuesday's close.

Construction of urban single-family homes rose 1.3 per cent to 46,400 units last month from 45,800 in February. Construction of multiple dwellings, such as condos, jumped by 28.3 per cent to an annual rate of 81,500 units from 63,500.

"New home construction is now at a more sustainable level after having been exceptionally strong over the past seven years, exceeding 200,000 units per year," the CMHC said in a statement.

Rural starts in March were estimated at an annual rate of 26,800 units, unchanged from February.

The housing downturn in Canada has hit starts, home prices as well as sales activity. Economists describe this as part of a "correction" in the sector, which is expected to last the better part of this year before rebounding in 2010.

Housing Market Up 8.6%

Canada's housing industry showed signs of life in February after several months of declines, with resales rising 8.6% from January thanks to lower mortgage rates and prices, the Canadian Real Estate Association reported Monday.

Despite February's gains, sales are still down 31% year over year, as are prices, which have fallen 9.2% in the past 12 months, CREA said.

Still, atotal of 28,669 homes changed hands in February on a seasonally adjusted basis via the industry group's Multiple Listing Service. It is the first month-to-month uptick in home-resale activity since September 2008.

"Typically, the spring market we're moving into generates more activity, and this year there are the benefits from historically low mortgage rates and improved affordability in most markets," said CREA president Calvin Lindberg.

CREA cautioned that listings remain high, although the number is trending lower, with 65,060 units listed for sale in February, down 10.9% from the same month a year ago.

"The housing supply is expected to continue easing, but it will take time before it realigns with lower demand," said CREA chief economist Gregory Klump.

"Economic uncertainty is keeping home buyers in a cautious mood, so homes are taking longer to sell than in recent years. Lower sales activity at the higher end of the price spectrum will keep the national MLS residential average price under downward pressure."

The national average price for home sales via the MLS was $281,972. Canada Mortgage rates, meanwhile, are near historic lows. On Friday, for instance, TD Canada Trust lowered its seven-year fixed mortgage rate by 0.2 points to 6.8%.

CREA said February's 9.2% annualized price decline is smaller than year-over-year drops posted in the past four months and is the first time the pace of decline decelerated since turning negative in July 2008.

"The report does offer some hope that the decline in Canadian home prices may have stabilized somewhat in February after appearing to have accelerated in the latter months of 2008," said TD Securities economics strategist Millan Mulraine.

"Not surprisingly, the biggest decline in prices were in Calgary (down 10.8% year over year), Greater Vancouver (down 13%), and Windsor (down 15.7%). However, prices in Toronto (down 5.4%) were also lower, while prices in Montreal (up 2.2%) and Quebec City (up 9.3%) continue to rise, albeit at a more modest clip," Mr. Mulraine said.