A Blossoming Spring Market

Home sales for February were up for the first time in 5 months, while the national average home prices continued their marginal upward trend.  In Vancouver, prices and sales have made a strong comeback, Calgary continues to break all-time price records, and Toronto single-family homes are in favor of the seller, with bidding wars pushing prices in some cases $100,000 over asking.

With the usual busy Spring Market upon us, Bank of Montreal released their no-frills 5-year fixed mortgage rate (2.99% with restricted options) in hopes to capture a strong market share for a second year in a row.  This time, they had no push back from the Canadian Government. The newly appointed Minster of Finance, Joe Oliver is ready to leave the mortgage market to its own devices, leaving it well enough alone – for now.  Overall, mortgage rates have dropped, but no big rate wars have materialized. With the continued low fixed rate options, consumers are trending to the security of a fixed rate over floating.

There are still conflicting opinions on Canada’s housing market and if prices are substantially over valued or if the country is undergoing a slow softening to a balanced market.  If over valued, it’s been suggested that the housing roll over will take effect by the end of 2014.

More highlights from the March headlines:

OVERALL

• More Canadians are willing to enter a bidding war and fight it out to secure a property, according to a home buying report released by Bank of Montreal. It says 34% of Canadians surveyed are willing to enter a bidding war when it’s time to buy a home, an increase of six points, or 21%, from a year ago.
• Anyone applying for a variable rate can qualify based on the five-year posted rate. The qualifying rate is based on an average of the six big banks’ posted rate for a five-year closed mortgage. Declining bond yields have lowered that qualifying rate to 4.99%. The decline may not sound like much but Rob McLister, editor of Canadian Mortgage Trends, says it means a consumer with a $300,000 home and 5% down needs 2% less income than they did just a few months ago.
• Mr. McLister says the general rule is when the gap between the five-year fixed and variables reaches 100 basis points or one percentage point, people start to shift to a floating rate.
• Canadian home prices rose 0.3% in February, pushing the Teranet-National Bank national composite price index to a record high for a second month in a row.
• Home prices were up in all five markets surveyed in Western Canada and were down in all five metropolitan eastern markets except Montreal.
• Over the last 12 months, the index has increased by 5%, with prices in Calgary rising 9.6% and Vancouver by 7.7%. Toronto was up 6.1%, followed by Edmonton (5.3%) and Hamilton (five%). Winnipeg was below the average at 3.5% and Montreal was up 1.9%.
• The dream of an affordable single-family detached home is fading fast. Affordability issues are driving developers to look for accommodations that can make housing more financially accessible and a key strategy is increasing the density of the pricey land parcels they are acquiring.
• Nationally, home sales are up 1.9% from a year ago, but BMO senior economist Robert Kavcic says markets vary widely across the country with half of Canada’s largest cities reporting a sales dip from a year ago.
• Canada’s housing market still looks balanced overall, but conditions vary widely across regions and for even segments within regions. National price momentum has picked up, but gains have not been widespread across markets—and that should provide some solace to policymakers.”
• “In Toronto and Vancouver, we’re starting to see bidding wars that we haven’t seen in two or three years,” says Ross McCredie, president and CEO of Sotheby’s International Realty Canada.
• CREA released results for February sales, which were up 0.3% from a January. The increase ended five straight months of declines but sales are still off 9.3% from the peak.
• The average home sold for $406,372 in February, which was a 10.1% increase from a year ago. CREA emphasized the year-over-year gain was impacted by the lack of activity in some of the country’s most expensive markets in 2013, in particular Vancouver.
• Mr. Oliver seems in no mood to quarrel with Bay Street and ready to largely leave the mortgage market to its own devices. “There’s a market and the bank made its decision, and the chief executive officer of the Bank of Montreal informed me about it,” Mr. Oliver told reporters in Ottawa. “I listened to his explanation, his reasons. I reiterated what I’ve just stated — the government is gradually reducing its involvement in the mortgage market.”
• “Sellers’ conditions continue to dominate the undersupplied single-family market (largely in Toronto and Calgary), lifting already high prices even higher.” That shortage, “combined with strained affordability for first-time buyers will buoy resale condominium demand in the year ahead,” says Scotiabank economist Adrienne Warren. While construction is likely to pick up in Calgary to better meet demand for single family homes, taking some of the pressure off prices, Toronto faces a longer-term problem, Warren said in an interview. That’s because new-home construction has plummeted over the last few years in the wake of the provincial Places to Grow policies, which have pushed most new construction into higher density condo towers.

PREDICTIONS

• Pacific Investment Management Co. forecasts Canadian home prices falling as much as 20% in the next five years, removing the boost from household spending that contributed to faster-than-expected growth last quarter. “Canadian housing is overvalued,” Ed Devlin, the London-based head of Pimco’s Canadian portfolio, said by telephone. “I would expect to see it happening at the end of this year, we’re going to start to see housing roll over.”
• Jim Murphy, chief executive of CAAMP, says the easier qualification and low rate might push a few people back into variable but a fixed rate of 3% is tempting to lock down. “You look at the news and it just seems the Bank of Canada is unlikely to raise rates,” said Mr. Murphy, who doesn’t think overnight rates will go up this year or possibly next year.
• Record Canadian housing construction led a faster-than-expected gain in building permits in January, government data showed one day after the central bank predicted a soft landing in the country’s real estate market.
• The Bank of Canada affirmed its forecast for a housing market “soft landing” with the ratio of household debt to income stabilizing around current record levels. Governor Stephen Poloz kept the benchmark overnight interest rate at 1%, citing balanced risks from stretched consumers and sluggish business spending.
• Economist Will Dunning argues neither Toronto nor Vancouver probably needed the latest rule changes, which included the reduction of the maximum amortization length from 30 years to 25 years — something that increased monthly payments and lowered how much debt consumers could get. The meddling has created a “dangerous” situation that might ultimately derail the housing market which will impact jobs and at the end of the day gross domestic product, says Mr. Dunning,
• “Calgary’s market continues to see the strongest fundamentals; Vancouver has rebounded from a soft patch; while Toronto’s market remains relatively balanced overall, though the condo market is more amply supplied,” said Robert Kavcic, senior economist with BMO Capital Markets, in a statement. “Overall, sales are expected to hold relatively steady in the year ahead, with price growth in the low single-digit range, below the rate of income growth.”
• Real estate brokerage Rock Advisors Inc. is predicting that the number of purpose-built apartments will grow in 2014 as developers look elsewhere for income. “Purpose-built rental apartments give such developers an ongoing revenue stream if they hold onto a building and rent out the units rather then selling the building for a quick buck,” Derek Lobo, chief executive of Rock Advisors
• “The heated housing markets are why apartments will do better in 2014,” says Mr. Lobo. “More and more Canadians are finding the high cost of home ownership isn’t what it’s cracked up to be. Even with condominiums, the cost of maintaining a mortgage and paying condominium fees presents an ownership premium of 10% over what it costs to rent an apartment.” Mr. Lobo does have an interest in promoting the apartment sector. His company is hosting a symposium on purpose-build apartments in May 6 to 7 in Toronto.
• The Ottawa-based Canadian Real Estate Association says sales are forecast to reach 463,700 in 2014, which would represent a 1.3% increase from 2013. The national average home price is forecast to be $397,000 in 2014, a 3.8% increase from a year earlier.
• “I expect fixed mortgage rates will edge marginally higher in the second half of 2014 as evidence confirms an anticipated pick-up in economic growth,” said Gregory Klump, chief economist with CREA, in a statement. “Marginally higher mortgage rates are likely to counterbalance that lift provided by stronger economic and continuing job growth and restrain the momentum of sales activity.”
• CREA: By 2015, sales are expected to reach 469,400 units, which would be a 1.2% increase from earlier. By 2015, the national average price is forecast to be $401,400, which would be another 1.1% increase.
• Benjamin Tal, deputy chief economist with Canadian Imperial Bank of Commerce, said all the mortgage changes amount to a 125 basis point increase in rates for first-time buyers. A shorter amortization payment means a higher monthly payment while decreasing size of a loan for consumers. “The market will slow, the only question is how quickly,” says Mr. Tal, who expects prices to fall nationally 10% to 15%. But in his view that’s not a bubble bursting. “The debate about overshooting is over, the question is the magnitude. At 10% to 15% that’s a market finding its footing.”
• But both the U.S. and Canada are expected to see “some release of weather-induced pent-up demand this spring,” says  Scotiabank economist Adrienne Warren.

VANCOUVER

• The Real Estate Board of Greater Vancouver said 2,530 homes were sold in February, a 40.8% increase from a year ago and a 43.8% increase from January. The board’s benchmark composite index reached $609,100 last month, a 3.2% increase from a year ago.
• February sales were close to the 10-year average for the month, while new listings were down 2.8% from a year ago and 12.1% from January, 2014.
• The Real Estate Board of Greater Vancouver said its benchmark price for a detached home in the region reached $932,900 in February. The area’s most expensive place to buy a detached home was West Vancouver with the average home selling for $2,145,200 last month.
• “Vancouver is unique across Canada in the severe mismatch between earning potential and cost of living. … Our business and industrial base simply does not provide the same number of high-paying white and blue collar jobs one might find in Alberta or Ontario.” Blair Mantin, VP of Sands & Associates, B.C.’s largest bankruptcy trustee
• Mantin reports B.C. is the only province west of Quebec that, in the past year, has not registered a decline in bankruptcies and consumer proposals (the latter involves a proposal for partial repayment of debt). “B.C. consumers are extremely over-extended.” A recent Sands & Associates study revealed consumer debt loads of $25,000 to $49,000 reflect a fiscal tipping point at which adult debtors start exploring bankruptcy or consumer-proposal options.

TORONTO

• In Toronto, the average detached home sold for $955,314 in February. But even in the suburban ring around the city, the average detached home $640,405.

CALGARY

• Calgary Real Estate Board, said that sales growth slowed in February from January but the total amount of activity was still up 8.68% from a year ago.
• “Demand growth in the single family sector has been restricted by the availability of product,” says Ann-Marie Lurie, chief economist with the Calgary Real Estate Board,
• The unadjusted single family benchmark price reached $482,800 in Calgary last month, a 1.28% increase from January and 9.1% jump from a year ago.
• February established all-time highs for MLS sale prices as well as luxury home sales as nearly one in five transactions turned into bidding wars in the marketplace due to a continued low inventory of available properties.
• Calgary Real Estate Board indicates all-time records, for any month, were set in the average city sale price ($482,530) and the median city price ($424,900) as well as in the single-family sale price ($550,312) and the single-family median price ($480,000).
• “Inventory’s facing a double whammy: new listings are well below average, and sales are well above. We haven’t seen inventory this low since the 2006 boom. And people are wondering: how long will that last,” said Scott Bollinger, broker with the ComFree Commonsense Network.
• Total sales in the city reached 1,854, up 8.68 per cent. The median price rose by 7.58 per cent and the average price was up 5.51 per cent. New listings increased by 1.54 per cent to 2,711 but active listings at the end of the month dropped by 18.28 per cent to 2,892.