Financial stability and low interest rates expected to boost Canadian home sales activity in 2010

Last week, federal Finance Minister Jim Flaherty tightened the rules for obtaining a government-backed mortgage. Prospective homeowners will have to meet financial qualifications for a five-year fixed-rate mortgage, as opposed to the three-year standard currently in place. Home buyers can still opt for a mortgage with a lower interest rate and shorter term. 

The other two changes include:

• Lowering the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes.

• Requiring a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation.

The Canadian Real Estate Association is taking a positive view of the changes, however, it is indicating some of the reasoning behind the decisions should be carefully examined. 

“Banks and governments should be cautious interpreting recent statistics, since comparisons are being distorted by recessionary activity a year ago and the subsequent rebound,” said Gregory Klump, CREA’s chief Economist. “Current trends reflect the release of pent-up demand when buyers moved to the sidelines during the recession. 

“Additionally, the HST in Ontario and British Columbia and coming interest rate increases will likely moderate activity and price gains beginning in the second half of 2010.” 

CREA’s analysis of housing activity on the Multiple Listing Service® systems of real estate boards across Canada has emphasized that a number of temporary factors have been skewing average price comparisons. Its most recent forecast indicates that national activity and average price will decline in 2011. 

It is also important to stress CREA is pleased the government did not increase the minimum down payments or reduce the amortization period — their impact on housing markets are potentially deep and damaging.

In Winnipeg, there were no wild fluctuations in market or pricing activity as happened last year in some Canadian markets. The local market tends to follow the stability inherent in Manitoba’s diverse economy. It is unusual to see any dramatic drop or increase when comparing monthly sales activity to the same month a year ago. 

The Canadian Real Estate Association has revised its forecast for home sales via the MLS® systems of Canadian real estate boards in 2010, and extended the forecast to 2011.

With Canadian economic growth rebounding from the recession, the unusually severe decline in sales activity in early 2009 is not expected to recur in 2010.  Annual activity in 2010 is forecast to be well above the previous year’s level as a result.  

CREA forecasts national activity will reach 527,300 units in 2010, up 13.3 per cent from 2009. This would represent a new annual record, standing 1.2 per cent above the previous peak in 2007. 

“Improved financial market stability and recovering global economic growth mean that home sales activity in 2010 is unlikely to repeat the dive it experienced in late 2008 and early 2009,” said  Klump. 

“Fiscal restraint, a strong Canadian dollar and a subdued inflation outlook point to marginal interest rate increases over the next couple of years, especially if the U.S. economic recovery proves to be weak and protracted,” he added.

“Although interest rates are expected to rise, they will still be low enough to keep affordability within reach for many home buyers requiring mortgage financing, and support overall housing demand,” said CREA president Dale Ripplinger.

Low interest rates are expected to boost housing demand in the first half of the year, resulting in strong annual sales growth in nearly all provinces in 2010, led by British Columbia and Ontario.

“The Bank of Canada will need time to gauge the effect of interest rate increases on Canadian economic growth,” said Klump. “It recognizes that consumer debt burdens are running high, so it will want to gauge the impact of interest rate hikes on domestic demand and overall economic growth. 

“Changes in interest rates impact the economy with a lag, so the timing and magnitude of interest rate hikes will be tricky, given that the bank expects the private sector to lead economic growth once temporary government stimulus spending expires,” he added.

National home sales activity is expected to remain strong in the first half of 2010, fuelled by low interest rates and home buyers motivated to avoid the HST before it comes into effect in Ontario and British Columbia.  

Over the second half of the year, national activity is expected to trend downward as the last of pent-up demand is exhausted, interest rates begin rising and the HST comes into effect in Ontario and British Columbia.

Interest rate increases will contribute to weaker national sales activity in 2011.  National home sales activity is forecast to decline 7.1 per cent to 490,100 units in 2011, putting it on par with annual levels reported in 2005 and 2006.

The national average home price is forecast to climb 5.4 per cent in 2010, reaching a record $337,500, with average price gains forecast in all provinces. The national average price increase will continue to reflect upward skewing from the rebound in activity among Canada’s priciest markets, particularly in British Columbia and Ontario. 

The national average price is forecast to ease by 1.5 per cent in 2011. Modest average price gains are forecast for all provinces except British Columbia and Ontario, whose share of national activity is expected to ease. The shift in the contribution made by provinces toward national activity will continue skewing the annual comparison in the national average price in 2011.

The price trend is similar but less dramatic for the weighted national average price, which compensates for changes in provincial sales activity by taking into account provincial proportions of privately owned housing stock. The weighted national average price is forecast to climb 4.8 per cent in 2010, and remain stable in 2011.

“The decline and subsequent rebound in sales activity for homes in the upper price spectrum in some of Canada's priciest markets skewed average prices upward in the second half of 2009 and into 2010,” said Klump. “This segment of housing activity in Ontario and British Columbia is expected to ease beginning in the second half of 2010, causing average prices to moderate in those provinces.

“A downward trend in national sales activity combined with an increase in listings will result in a more balanced market,” he added. “Although builders are understandably more upbeat than they were during the depth of the recession, speculative building will likely continue to be held in check. 

“As a result, while the real estate market will become more balanced, Canada will continue to avoid the massive realignment in housing supply and demand experienced in the U.S.”