Chill starts to set in for real estate
February 18, 2010
Tony Wong
BUSINESS REPORTER
Ottawa's tighter mortgage rules, combined with a new harmonized sales tax in Ontario and an impending interest-rate increase, should slow the Canadian housing market in the second half of the year, erasing fears of a bubble, analysts say.
"Combined, they should all take some serious steam out of housing," said Douglas Porter, deputy chief economist at BMO Capital Markets. "By then, the bubble chatter should fade."
The Canadian Real Estate Association reported Wednesday that resale home sales across Canada dipped by 2.8 per cent in January from the near-record levels reported in December, suggesting the market may already be cooling.
There were 46,394 existing homes sales last month, compared with 48,144 in the prior month. All figures are seasonally adjusted.
"January results suggest the national resale market may be past the recent peak," CREA chief economist Gregory Klump said. "One car doesn't make a parade, so a few more months of results showing a cooling trend will be required before talk of a Canadian housing bubble begins to fade."
Before that happens, analysts expect housing activity will remain heated in the coming months, as buyers rush to purchase before the new mortgage requirements come into effect April 19.
One thing that hasn't been cooling so far: the average residential price was up by 19.6 per cent to $353,129, CREA said.
Actual (not seasonally adjusted) sales activity in January was up 58 per cent ago from year-ago levels. Sales in January 2009 were the lowest in more than a decade.
First-time buyer Christie Gupta said she is looking for a place in downtown Toronto, but is worried that the new mortgage insurance requirements mean she would not qualify for a loan big enough to live in the city core. She now qualifies for a $280,000 loan. But the new rules would mean she would likely qualify for less.
"You're not getting a lot of condo for $280,000 in the first place, and I don't want to end up back in the suburbs," Gupta said.
Ottawa announced the new regulations Tuesday, including a requirement that borrowers of insured mortgages be qualified at the five-year fixed rate, even if they opt for a shorter term. Buyers of investment properties must also come up with a 20 per cent down payment and consumers who already own a home can borrow up to 90 per cent of the value of property instead of the current 95 per cent.
Despite the changes, some critics doubt Ottawa's tougher rules will do the trick.
"What they have done so far is good, but it's a question of risk management. The government could have taken more drastic steps and gone further to ensure that there is less risk of a bubble," said Louis Gagnon, associate professor of finance at the Queen's School of Business.
Finance Minister Jim Flaherty had been rumoured to be reducing the maximum amortization period from 35 years to 30 and bumping up minimum down payments from 5 per cent to 10 per cent. Instead, the government decided on less-stringent measures.
"Those steps would have kept the system safer and reduced the risk of mortgage defaults in the future," said Gagnon.
Because the mortgages are insured by the Canada Mortgage and Housing Corp., taxpayers are ultimately on the hook for any defaults, he said.
However, Gagnon said he could understand why Flaherty chose a tweak instead of a full-blown clampdown.
"They have to juggle the fact that this may jeopardize the economic recovery," said Gagnon.
Phil Soper, CEO of Royal LePage, said the government did the right thing by not implementing tougher rules. "My acid test is not whether the rules are right for today, but whether they will stand the test of time tomorrow, when the market may be cooling off," Soper said.
Another positive sign for buyers is that new listings totals also rose slightly in January by three tenths of one per cent on a month-over-month basis as more houses were put up for sale, according to CREA. That is the highest level since November 2008.
Toronto Star