Letting Air Out Of The Bubble: Canada’s Housing Market Balancing
March 18, 2010 – 7:24 am
Canada’s housing market may be strong but economists are predicting a levelling off in coming months, easing fears of an asset bubble.
Stronger inventory, new taxes and tougher mortgage rules should all play a role in cooling the booming housing market in the near future, say analysts, and end-of-year interest rate hikes are expected further squelch what many feared was becoming an unsustainable ascent.
New Inventory to Satisfy Demand
A recent release by the CREA indicates that available units rose 2.4% to 73,849, the strongest inventory data since October 2008. The additional availability will help satisfy the continuing demand, which is expected to stay strong in the next couple of months and then adjust downward.
Currently, the CREA figures show there is sufficient inventory for the next 4.7 months, up from 4.5 months in January. With a better supply, buyers will not be forced to compete for a limited supply, and housing prices should begin to stabilize.
“Housing markets are becoming more balanced,” said Chief Economist Gregory Klump of the Canadian Real Estate Association (CREA) noted in the release. “There are still a number of major markets where sales negotiations favour the seller due to a shortage of inventory, but supply has begun rising. Further expected supply increases will continue to take the steam out of housing markets as the year progresses.”
Buyers Hurrying to Beat New Tax, Rules
As spring nears, seasonal demand will keep up the momentum in purchases, augmented by those buyers looking to avoid the Harmonized Sales Tax on newly-built homes that will be imposed as of July in Ontario and British Columbia, currently the drivers of Canada’s housing market.
Price Drop and Rate Hikes Could Burst Bubble
Rock-bottom interest rates have also lured many buyers into the market, and there have been fears that sky-high housing prices may tumble in the near future; paired with dramatic interest rate hikes in coming years, this could spell disaster for mortgage holders already on the margins of affordability.
While the Bank of Canada has pledged to keep interest rates stable for the short term, rate hikes are inevitable in inflation is to be kept under control, and most forecasts call for increases to begin in the year’s third quarter. If the loonie continues its astronomical trajectory, rate hikes may be dramatic and frequent.
For those who can only just afford their current mortgage payments, big interest rate hikes might mean payments that are doubled, even tripled come renewal time; and for those who purchased with little down payment, a fall-off in housing prices might leave them in a position of negative equity – where their mortgage exceeds the market value of the property.
New Rules to Widen Safety Margin
However changes to the regulation of insured mortgages to take effect next month are likely to further dampen activity, with significantly higher deposits on insured investment properties and more stringent loan qualifications expected to reduce speculation and ensure borrowers are in a better position to deal with future interest rate hikes.
“One has to watch this to make sure that one does not have borrowers who cannot afford higher interest rates, because as we all know interest rates are historically low and they have nowhere to go but up,” said Finance Minister Jim Flaherty to the UK Chamber of Commerce this week.
Unemployment Remains High as Stimulus Spending is Cut
Nevertheless, analysts will keep a watchful eye on the unemployment rate, as this is a key factor in mortgage defaults. Currently, Canada’s unemployment figures are at a worrisome 8.2%, just as the government has announced a pull-back in stimulus spending in an attempt to shrink its $53.8 billion-dollar deficit.
Sales Dip, Prices Stay High
Overall, February’s sales numbers have dipped slightly for the second consecutive month according to the CREA, but remain well above last year’s figures for the same period. Toronto saw an increase in sales but was offset by a strong dip in Vancouver’s sales figures, which is likely linked to the Winter Olympics that were hosted there last month.
Home prices saw strong gains over last year, jumping 18.2 % nationally, though the gains appear to be slowing compared to previous months.
Bargain Hunters Look South
Rising property values on this side of the border have also spurred some buyers to look for bargains south of the border: Canadians were the top foreign buyers of property in the US last year, according to a study by the National Association of Realtors .
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