Real estate market at tipping point – At least one real estate company says the housing market is not quite dead yet.
Royal LePage Real Estate Services says 2012 will finish with average home prices, up 3.2% and slightly ahead of its 2.8% growth forecast earlier this year. But the report suggests Canada’s residential real-estate market appears to be at a tipping point, with some areas likely too expensive for buyers at the current levels.
“We have had three years of solid house price appreciation in almost all regions of the country,” said Phil Soper, chief executive of LePage Real Estate. “Confidence in Canada’s real estate market is sound, but home prices cannot grow faster than salaries and the underlying economy indefinitely. Some regions have reached or perhaps even exceeded the current upper level of price resistance as buyers have embraced an era of historically low mortgage rates.”
He said that changes to mortgage rules introduced by Finance Minister Jim Flaherty over the past four years will keep some people on the side-lines, particularly first-time buyers who account for up to half of the transactions.
Thoughts on the Tipping Point
Flaherty’s latest changes were announced last month and went into effect on Monday.
“The cumulative impact of these new regulations has created a significantly higher hurdle for young buyers seeking their first home and comes at a time when the market was slowing of its own accord. The timing of this intervention was unfortunate,” Soper said.
Starting Monday, lenders can now only issue home equity loans up to a maximum of 80% of a property’s value — down from 85%.
The maximum amortization period also drops to 25 years from 30 years — giving borrowers less time to repay the debt in full.
In addition, the federal government is capping the maximum debt ratios for households and limiting government insurance to mortgages on homes with a purchase price of less than $1-million.
The tightening, announced by Finance Minister Jim Flaherty June 21, was Ottawa’s latest attempt to slow down the accumulation of debt of Canadian households, which reached a record 152% of income in the fourth quarter of last year.
Central bank governor Mark Carney has been warning for several years that some Canadians are getting in over their heads with debt, and that they could face problems once interest rates — which sit at historic lows — start rising or if there is a second economic crisis.
Flaherty has tightened mortgage insurance rules four times since 2008. Following each move, national average resale housing prices declined, only to regain the lost ground and continue climbing, according to data from the Canadian Real Estate Association. Canadian home prices increased 19% from the start of 2007 through April.
The new rules could also take the heat out of a Toronto real estate market where average prices have surged by a third to $516,787 from five years ago and there are more skyscrapers under construction than any city in North America.
Mr. Soper says that when national average home values do soften, history has shown it will only be for brief period.
“Following a period of significant price appreciation, Canadian real property prices tend to flatten versus decline, until the economy catches up to the new price norms,” says LePage in a news release.
The company noted the last notable drop in prices nationally took place in 2008 and it lasted only 11 months. Before that, there was a period of over 16 years without a significant decline.
The longest period of national average price decline since 1980 took place in 1995 and lasted for 14 months.