Category: National Real Estate News

This article was written by Sunny Freeman and appeared on the Globe and Mail website Tuesday, December 14th, 2010.

Preet Bharati was nervous about plunging into home ownership this year after hearing of bidding wars and stiff competition for overpriced homes – but when she began house-hunting this summer she was relieved to find the buying spree of early 2010 had run its course.

“We ended up getting our house for under the asking price,” the 30-year-old new Mississauga, Ont. homeowner explained of her shock at securing her chosen house in June. “It was a little bit surprising because the feedback that I was getting from friends of mine, when they were looking, every offer was way above the asking price.”

As Ms. Bharati discovered, 2010 was a tale of two housing markets.  However, the year of wild twists and turns is expected to be followed up by a 2011 performance that economists sum up in one word: boring. “The housing market is going to become a lot more boring place,” says Gregory Klump, chief economist at the Canadian Real Estate Association. “Boring is something that both buyers and sellers can look forward to after the crazy roller-coaster ride that we’ve been on since the depths of the recession in 2008.”

The opening months of 2010 saw panicked buyers and overvalued homes in a market that heavily favoured sellers.  A rebound in consumer confidence and pent-up demand from the recession, combined with record low interest rates of 0.25 per cent and impending tax policy changes to condense sales into a short period when Canadian home sales and prices soared to record heights.

Sellers took longer than buyers to regain confidence, causing a delay in getting inventory on to the market.

Open houses were packed, sellers received multiple offers over asking prices and buyers engaged in bidding wars to secure a home while mortgage rates were low. That sent the average home price skyrocketing.

That unsustainable surge in sales, and the ensuing sharp turnaround, led to a “whiplash effect” around the middle of the year – a rare phenomenon that won’t be repeated in subdued 2011, says Phil Soper, president and CEO of Royal LePage. “The big story would have been the dramatic surge in activity level and we’re paying for it now,” Soper says. “It was a highly front-end loaded year,” he says, adding that 60 per cent of activity took place in the first half of the year, compared to an average 55 per cent.

As home prices continued their upward trajectory despite faltering sales, economists, including the head of the central bank, asked questions about home affordability and how consumers would fare when interest rates inevitably rise.

Canada’s overheated housing market caused debate about whether the foreclosure crisis that has caused so much grief for homeowners south of the border could happen in Canada. However, most Canadian real estate experts dismissed the notion of a Canadian housing bubble. “It shouldn’t have gotten the kind of attention it did,” Mr. Soper says. “There was nothing to fear in terms of a sustained double digit price increase, it really just lasted a couple of months and settled back down.”

In the end, the effects of policy changes were minimal and interest rates will end the year at a still low one per cent, but the anticipation of bigger changes caused buyers to panic, says Adrienne Warren, a senior Scotiabank economist. “There was a large degree of perception of people wanting to get in at the right time in the market. But unfortunately in some cases it was not the right time in the market when everyone’s rushing to get in and it leads to bidding wars,” she says.

The upward momentum reversed in April when demand that pulled sales ahead began to dwindle just as Bank of Canada governor Mark Carney lifted a pledge to keep interest rates at rock bottom. April also ushered in more stringent mortgage qualification rules aimed at discouraging homeowners from taking out mortgages on homes they might not be able to afford down the road.

By early spring, inventories returned as homeowners saw the high prices sellers were fetching for their homes and started listing their homes. The market balanced out between buyers and sellers and prices peaked at $346,881 in May.

Monthly sales declined in the summer, usually the busiest time of year, after Mr. Carney raised interest rates for the first time in a year in June, albeit by a modest 0.25 per cent. He followed up with incremental raises in subsequent announcements in July and September.

Sales reached a trough in July, the month the harmonized sales tax regime took effect in the country’s hottest housing markets, Ontario and B.C. Existing home sales tumbled nearly 30 per cent from a peak of 521,148 in January to 378,258 in July. By comparison, sales in an average year are much flatter on a monthly basis and tend to hover between 450,000 and 500,000 consistently.

Construction and pricing on new homes followed a similar pattern, but lagged the resale market as contractors adjusted new building to the reduced level of demand to avoid a glut of empty homes on the market.

The market has stabilized after bottoming out in July with the most recent data showing three consecutive monthly increases since. Still, the first half of 2010 is going to cast a long shadow over the next year, says Mr. Klump, making it difficult for sales in the first half of 2011 to outpace year-on-year comparisons.

CREA projects a 4.9 per cent slide in sales this year and nine per cent next year. The drop is tied to lacklustre economic and job growth, weak consumer confidence and interest rate hikes that are expected to resume next year. However, it said average home prices are expected to rise by 3.1 per cent across the country this year, reaching $330,200. Next year, prices are projected to fall by 1.3 per cent to a national average of $326,000, tied to weakness in British Columbia and Ontario.

 

This article appeared on the CBC News website on December 13, 2010.

Bank of Canada governor Mark Carney repeated warnings Monday to Canadian households and businesses: don’t be caught off guard by current low interest rates and that repercussions from a hike could be swift.

In a speech to the Economic Club of Canada in Toronto, Carney said efforts by various governments to stimulate the economic recovery are keeping borrowing rates low. But when rates do begin to rise again, Carney said, the repercussions may be swift and fierce and have the potential to catch many with debt loads they can no longer afford.

Finance Minister Jim Flaherty said he talks with bankers about loan default rates, and “there is reason for concern,” but not “extreme concern.” The government has no plans to take immediate action, he added

Flaherty pointed out that the government has twice tightened mortgage rules, in 2008 and early 2010, and will do so again if it becomes necessary. But he said the government has to balance the availability of credit, and the impact on employment in the housing sector if rule tightening led to a construction slowdown.

Carney’s warning came the same day Statistics Canada released data showing the ratio of Canadian household debt to disposable income rose to a record high in the three months ending in September. “Cheap money is not a long-term growth strategy,” he warned. “Experience suggests that prolonged periods of unusually low rates can cloud assessments of financial risks.”

Hike Expected May 31

Flaherty said Canadians should assume rates will rise, “and they should be cautious.” The Bank of Canada will set interest rates based on inflation, not on whether a large swath of Canadians have taken on too much debt, Carney added. He suggested the bank may raise interest rates even in a low-inflation environment to discourage risky borrowing. “While the bar for further changes remains high,” he said, “the bank has the responsibility to draw the appropriate lessons from the experience of others who, in an environment of price stability, reaped financial disaster.”

On Dec. 9, the Bank of Canada warned that the risks of another recession are growing, given Europe’s debt crisis, widening gaps between exports and imports among countries, and that Canadians, with their high levels of debt, may not be prepared for it.

Japan’s lost decade

Twice in the speech, he raised the spectre of Japan’s lost decade and even the Great Depression, suggesting some of the problems faced today are as formidable. “The crisis is not over, but has merely entered a new phase,” he said. “In a world awash with debt, repairing the balance sheets of banks, households and countries will take years.” “As a consequence,” he said, “the pace, pattern and viability of global economic growth is changing, and Canada must adapt.”

Carney said with currency tensions rising, there is a concern about protectionist measures as occurred during the Great Depression because of the “death grip” of the U.S. dollar as the world’s preferred currency for foreign exchange reserves. “Over a dozen countries are now accumulating reserves at double-digit annual rates,” he pointed out, “and countries representing over 40 per cent of the U.S.-dollar trade weight are now managing their currencies,” or subtly manipulating them.

The global adjustment means Canadian exports will remain weak, he said, urging firms to improve their competitiveness to meet the challenge.

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This article was posted by the Toronto Sun on December 7, 2010.

The Canadian housing market is likely to cool further in 2011, returning to more normal long-term growth patterns after a decade-long bull run, according to a report by RE/MAX.

The real estate company forecasts housing sales will fall 5% to 441,000 homes this year and remain flat in 2011. Prices however will continue to rise, gaining 7% this year and 3% next as a lack of supply outweighs falling demand, RE/MAX said.

“In terms of resale housing activity, what many are talking about as the new normal is actually a return to the traditional real estate cycle,” says Michael Polzler, the company’s executive vice-president and regional director for Ontario-Atlantic Canada.

“The past decade was truly unprecedented — never before have we experienced a run up that was as strong or lasted as long.”

Record low interest rates fuelled a home buying spree in 2009 that helped pull the Canadian economy out of recession and pushed home sales back to record levels. The market cooled rapidly over the summer as the Bank of Canada began hiking interest rates, though recent data have indicated the market may be stabilizing.

Ample inventory levels, steady demand and moderate growth, both in terms of sales and prices, will characterize the market in 2011, RE/MAX said.

“Looking forward, we see steady improvement in provincial and local economies — which will bode well for housing markets across the board,” says Elton Ash, RE/MAX’s regional executive-vice president of Western Canada. “The relentless drive in the market reminiscent of years past will be gone and instead, we can expect to see more normal, balanced market conditions, with buyers maintaining a slight edge.”

British Columbia is likely to see the strongest sales next year, with Greater Vancouver rising 10%, followed by Victoria at 8% and Kelowna at 6%.

Almost all regions are likely to see increased prices, led by St John’s, N.L., and Labrador with gains of 8% next year.

The value of homes in Greater Vancouver, Kelowna, Regina, Saskatoon, London-St. Thomas, Ottawa, Sudbury and Greater Montreal is also predicted to climb 5%.

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Dropping mortgage rates and softer house prices pushed housing affordability higher in the third quarter, the Royal Bank of Canada said in its quarterly housing report Monday.

The bank’s affordability index measures how much pre-tax income is required to cover all the costs associated with owning a home. Broadly, the index monitors the costs of condos, detached bungalows and two-storey homes. It was the first time that home affordability has improved in four quarters.

The quarterly report said the index dropped at the national level by between 1.4 and 2.5 percentage points from the second quarter (meaning affordability improved) depending on the type of property. Such a range is still above the long-term average. Bungalow costs fell by 2.4 percentage points between the second and third quarters, to 40.4 per cent of pretax income. That’s still 0.3 percentage points above the third quarter of 2009, when Canada was just beginning to come out of a major recession, and above the 15-year average of 39 per cent.

The situation was similar with standard two-storey homes, which gobbled up 46.3 per cent of pre-tax income — 2.5 percentage points less than in the second quarter of 2010 but up 0.3 percentage point from the third quarter of 2009. The average measure for two-storey homes, since RBC began compiling the numbers in 1985, has been 43.3 per cent.

Modest retreat

National home prices have retreated modestly in recent months, as market conditions cooled considerably during the spring and summer from their earlier boil, the report found. “While this represented a decline from the second quarter, home prices were still 5.8 per cent to 6.8 per cent higher year-over-year.”

Condos remained the most affordable type of housing track, requiring 27.8 per cent of pre-tax income to cover mortgages, taxes and utilities and one percentage point above the long-term average of 26.8 per cent. However, the improvement from the second quarter of 2010 was only 1.4 per cent and remained 0.1 percentage point above the third quarter of 2009.

RBC says all provinces had improvements in housing affordability during the third quarter, especially British Columbia. However, the cost of home ownership in British Columbia remained high by historical standards — following increases that began in the first quarter of 2009. A detached bungalow in British Columbia consumed 59 per cent of pre-tax income, while two-storey homes ate up 67.5 per cent of income and condos required 32.9 per cent of pre-tax income — all above the national average.

Alberta and Manitoba are the only two provinces where the RBC Measures stand below their long-term average in all housing categories, an indication, the bank says, that there is little stress in these markets.

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