Home prices will continue to rise this spring as buyers scramble to close deals ahead of expected higher interest rates, new mortgage rules and new taxes in two key markets.
A report by RBC Economics issued Monday found that the cost of owning a home in Canada increased slightly across all housing segments in the closing months of 2009.
Strong demand, fuelled by exceptionally low mortgage rates, has increased competition for the limited supply of homes for sale, which continues to drive prices up, the report said.
RBC senior economist Robert Hogue said the problem is likely to get worse with an anticipated rise in interest rates in the second half of the year.
The Bank of Canada has pledged to keep its key overnight rate at 0.25 per cent, where it has been since last spring, until the end of the second quarter. But economists anticipate it will begin rising as early as July.
Historically low interest rates have been cited among reasons for the strong housing market, with sales of existing homes moving higher again in February and setting monthly records in both Ontario and Quebec.
The Canadian Real Estate Association said 36,275 homes were sold across the country in February, up 44 per cent from the same month in 2009, when the recession was still impacting both consumer optimism and loan activity.
But February’s year-over-year gain was much smaller than in the previous three months, CREA said. Part of the reason was that February home sales were down in Vancouver as the Olympics impacted activity there even as sales in Toronto logged an equally large gain.
Overall, seasonally adjusted home sales were down 1.5 per cent in February compared with January.
Economists predict that real estate markets in B.C. and Ontario will remain hot in the months prior to the introduction of the harmonized sales tax in those provinces on July 1, which will increase the transaction costs associated with a home purchase.
Douglas Porter, deputy chief economist at BMO Capital Markets, said some buyers in Ontario and B.C., which combined account for over half of national sales, are advancing their purchases to avoid paying the HST.
“It’s no coincidence that Ontario and B.C. have seen the biggest gain in sales in the country,” he said.
CREA chief economist Gregory Klump said buyers in those provinces are driving national sales activity higher in the first part of the year.
“It should remain a tight market with negotiations favouring the seller in a number of major markets in the first half of this year,” he said.
Klump said that strong resale housing demand continues to draw down inventories, but softer sales activity and an increase in new listings in recent months has helped slow the depletion of available properties.
“Those sellers who moved to the sidelines at the depth of the recession will be putting their homes back on the market in response to headline average price increases,” he said. “
Porter said the increase in supply from ultra-low levels helps bring the market closer to balance, but that the still-tight market means prices will remain high.
“We’re going to get a very hot market in the next few months but it won’t overheat,” he said.
“I think we’ll get one more wave of relatively strong numbers over the spring and then we’ll crest and the market will come off the boil in the second half of the year.”
He added that Ottawa’s recent efforts to “release some steam from the market” will help slow activity, and “the housing market will pull up just short of bubble territory.”
Finance Minister Jim Flaherty announced new mortgage qualification rules last month to discourage homeowners from taking out mortgages on homes they might not be able to afford down the road when rates return to more normal levels.
In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year, fixed-rate mortgage even if the period they choose is shorter and the interest rate they pay is lower.
Porter said the changes will prompt those affected — primarily first-time buyers and investors — to buy in advance of the new rules, and bump up sales in March.
Still, other buyers could be hesitant to enter the frenzied market this spring and may tolerate a small spike in interest rates and wait for conditions to cool off, he said.
“Some cooler heads will decide they can get a better deal in the second half of the year even if it does come at a higher interest rate.”