By Tony Wong
Tighter mortgage rules have caused home sales in Canada to spike temporarily, but analysts say there is still a reckoning to come.
Canadian existing home sales were higher than expected in January because of buyers jumping in the market early before new mortgage regulations take effect, says the Canadian Real Estate Association.
Seasonally adjusted activity rose by 4.5 per cent in January, compared with a month earlier, reaching the highest level since last April.
Much of that activity was led by the Toronto and Vancouver markets, according to CREA in figures released Tuesday.
The Toronto market beat the national average, with sales up by a seasonally adjusted 5.2 per cent.
“We anticipated the announcement of tighter mortgage regulations which will come into effect this March, would pull forward sales activity in the first quarter of 2011, “ said Gregory Klump, CREA’s chief economist. “The sharp rise in sales activity in Toronto following the announcement confirms this.”
In January, Ottawa reduced the maximum amortization period to 30 years from 35 years for new government backed insured mortgages with loan-to-value ratios of more than 80 per cent.
It also lowered the maximum Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.
“It was widely expected that sales activity would pick up through January and February of this year as buyers bring purchases forward to beat out tighter mortgage insurance rules,” said Diana Petramala, an economist with TD Bank.
However, economists are forecasting the strong first quarter will be followed by a weaker second quarter as a result.
“As was the case the last time the federal government made mortgage insurance rules more restrictive, the strength in sales will likely be followed by a short period of weak housing data,” said the bank.
Some of the strength in the housing market is also because of continued low interest rates, says the bank. But that is not expected to last for long. Interest rates are expected to remain low for the first half of 2011, but the bank expects the first in a series of rate hikes in July.
“The rise in interest rates is expected to dampen housing activity in the coming months,” said Petramala. “On the whole, the housing market remains in a well balanced position with little price pressures on the horizon.”
The bank expects prices to move “sideways” over the next few months, but not dip significantly.
Royal LePage CEO and president Phil Soper also said Tuesday he expects housing prices to remain essentially flat, or in line with inflation by the end of 2011.
Other forecasts have pegged the market to be as much as 25 per cent overvalued.
“Despite the doom and gloom forecasts I think it will still be a solid year,” said Soper. “An improving economy and jobs market will help to offset any restructuring in home prices, which is key. If there is any overshooting in the market, it is also happening at a time when there is underlying economic improvement overall.”
The national average price for homes was $343,675 in January. That figure has been flat for the last three months. However, it is up 4.5 per cent compared with January of last year.
CREA says some of that gain was a distortion resulting from million dollar home sales in Vancouver, which remains the country’s priciest market.
If Vancouver were taken out of the equation, prices would only be up by less than 2 per cent, or about inflation, according to BMO Capital Markets Economist Doug Porter.
“The market appears to be well balanced apart from Vancouver,” said Porter. “However, that city marches to its own drummer and its particular rhythm may not have implications for the rest of the country.”
On an unadjusted basis, Canadian existing home sales were down 6.6 per cent in January compared with the same month a year ago when sales were hitting record levels.
Listings are also increasing, up by 3.9 per cent, meaning more choice for buyers. However, sales activity remained strong. The number of months it took to sell a home was 5.5 months, the lowest level since March of last year.
Busy January
4.5 per cent – how much sales activity rose in Canada
5.2 per cent – how much sales rose in Toronto
$343,675 – the national average price for homes last month
5.5 months – the average time to sell a home
http://www.moneyville.ca/article/938976–home-buyers-race-to-beat-tighter-mortgage-rules
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