Craig Harding

Two Major Banks Raise Rates!

Low inventory levels set stage for heated Spring market in most major Canadian centres, says RE/MAX

Active listings down in 81 per cent of markets in January

Lack of inventory will be the greatest challenge facing housing markets across the country this Spring,
according to a report released by RE/MAX.

The RE/MAX Market Trends Report 2010, which examined real estate trends and developments in 16
markets across the country, found that unusually strong activity during one of the traditionally quietest
months of the year has led to a sharp decline in active listings in 81 per cent of markets surveyed. The
threat of higher interest rates, tighter lending criteria, and in British Columbia and Ontario, the
introduction of the new Harmonized Sales Tax (HST) have clearly served to kick-start real estate activity
from coast-to-coast, prompting an unprecedented influx of purchasers. As a result, 87.5 per cent of
markets posted an increase in sales in January. Average price appreciated in 81 per cent of markets
surveyed.

Affordability is the catalyst for the vast majority of purchasers in today’s housing market. While
homeownership is still within reach in many major centres, levels are slipping. There is a growing sense,
on both sides of the fence, that the time to act is now.

Markets experiencing the tightest inventory levels include Toronto (- 41 per cent); Kitchener-Waterloo
(-33 per cent); Ottawa (- 30 per cent); Victoria (- 30 per cent); Greater Vancouver (- 27 per cent); Halifax-
Dartmouth (- 19 per cent); London-St. Thomas (- 18 per cent); Regina (- 16 per cent); and Winnipeg (- 13
per cent). Conditions were still balanced, but starting to tighten in Calgary, Edmonton and Saskatoon,
particularly in the single-family detached category.

The highest year-over-year sales gains were reported in Greater Vancouver (152 per cent), Kelowna (121
per cent), Greater Toronto (87 per cent), Victoria (69 per cent), Hamilton-Burlington (58 per cent),
London-St. Thomas (55 per cent) and Calgary (47 per cent). Western Canadian cities dominated the list
of centres with the highest increases in price appreciation. These included Victoria at 25.5 per cent,
Kelowna at 22 per cent, Greater Vancouver at 19.5 per cent, and Winnipeg at 17 per cent. St. John’s (23
per cent) and Toronto (19 per cent) were also among the frontrunners for price growth.

There have never been so many motivating factors in play at once. We’re in for a heated Spring market
that will, in all probability, spill over into the summer months as the window of opportunity draws to a
close. The supply of homes listed for sale has been drastically reduced, housing values are once again on
the upswing, and banks and governments are moving in unison toward stricter lending policies.

While buyers are taking advantage of favourable conditions, sellers too are reaping the rewards.
Competing bids are a factor in the marketplace once again, with well-priced listings—especially at the
entry-level price point—experiencing multiple offers. Properties priced at fair-market value will likely
sell quickly for top dollar. The overall pressure on sales and price is significant across the board – and
it’s not likely to subside unless more inventory comes on-stream.

The level of frustration is growing, as pent-up demand builds. For every successful offer, there are those
that will walk away empty-handed. They’re thrust back into the buyer pool and the process starts all
over again. Some buyers are upping the ante, while others are considering alternate housing options.
Still, purchasers remain cautious in their bids, with most careful not to max out debt service ratios.
Recent revisions to lending criteria will add fuel to the fire in the short term. Buyers considering a
variable rate mortgage will step up their plans for homeownership in the next month or so just to get in
under the wire. In the longer term, buyers will adjust, but move forward. Compromise has long been a
reality—particularly in the larger centres. This simply means they may go smaller or further in their
pursuits.

It’s been a 180 degree turnaround from this time last year. It’s clear that real estate from coast to coast
has roared back to life and markets are once again firing on all cylinders. The vast majority of markets
are now recovered and fully-evolved, with all segments working in tandem. At the luxury price point,
activity was brisk in seventy-three per cent of centres surveyed, with momentum ramping up in the
remainder. Opportunity exists in some areas, but the question is for how much longer?

New rules announced by the federal government today will make it somewhat more difficult to get financing for home purchases and refinancing. The three new rules, which take effect April 19th place more stringent controls on mortgage qualification:

1. requirement that borrowers have the resources to qualify for a five-year fixed-rate mortgage even if they decide on a lower-cost variable rate mortgage. Typically 5-year fixed rates are higher than variable rate mortgages. This will have the effect of reducing the total amount that one could qualify for.
   
2. lowered maximum amounts that can be withdrawn when borrowers refinance mortgages. The maximum will now be 90 percent of the value of the home, down from 95 percent.
   
3. Ottawa will also require a minimum down payment of 20 percent for insured mortgages tied to nonowner-occupied properties that are being bought for speculation. The existing rules allowed investors to put down as little as 5% of the value of a property. This will effectively reduce the number of speculators and investors purchases.
   

As real estate values and activity have been exceptionally strong since mid 2009, the feds were concerned of an impending housing bubble. With the rest of the economic recovery still quite weak, the Bank of Canada is not wanting to slow the housing market through rate increases as it would have a detrimental effect on the rest of the economy.

The short term effect of these new rules will be a flurry of activity as consumers take advantage of the existing rules until April 19th. Though property inventory levels were starting to build slowly since December 2009, this increased buyer activity will surely deplete inventory levels again which will push prices higher. I anticipate inventory levels to remain low throughout most of 2010.

There are still a number of other rule changes that the feds can implement to put the brakes on the housing market but have for the time being, not implemented them. For example, they could increase the minimum down payment requirements from the current 5% (insured) and 20% (conventional). They could also reduce the maximum allowed amortization period from its current 35 years.

By the fall of 2009 it was readily apparent that the Calgary real estate market had turned a corner; from a buyer's market to a balanced market. First time home buyers drove the marketplace with the Bank of Canada continuing to hold borrowing rates at record lows and property valuations declining approximately 8% from 2008 levels. Property inventory levels showed significant declines, particularly in the less than $400k pricepoint. The increasing shortage of 'good' properties has driven some first time buyers back into the rental markets,at least in the short term. These short term rental agreements bode well for the Calgary real estate, as I anticipate the market to pick up significant steam as we approach the historically hotter spring market.

A number of factors are alligned to push demand and prices higher: - talk of increased borrowing rates by the Bank of Canada, significant residual unfulfilled demand (including the short term renters) from the fall of 2009 and continued low inventory levels.

Are we close to a market bottom?

Investors participating in any fluid market try to time that market’s high as well as its bottom. This applies as well to the real estate market; investors want to take advantage of market gyrations to maximize their investment while the average home buyer wants to protect their investment in perhaps the largest purchase that they will ever make.

Statistics are one tool that we can use to analyse and anticipate market trends. Other factors that often come into play are intuition, news media, emotion and ‘here say’. Even with all of the analytical tools at hand it is understood that timing any market perfectly is not at all an accurate science. Inherently, when we realize that a bottom or a market high has been reached, that point (high or low) has been passed and is now relegated to a historical statistic.

So if we can’t really perfectly time a market, then what? Well, if we can at least take action close to a market high or market bottom the desired end result is to all intents and purposes achieved.

In looking at recent statistics in the Calgary real estate marketplace it would appear that we are approaching a balanced market. Take for example the fact that we have:

• A year over year increase of over 25% in Calgary Metro-Single Family Home sales to new listing ratio for March 1 – 25^th (49% as compared to 39% for the same period in 2008)
• A year over year increase of over 31% in Calgary Metro-Condominium sales to new listing ratio for March 1 – 25^th (46% as compared to 35% for the same period in 2008)
• A year over year decrease of over 61% in Calgary Metro – Single Family Home listings added for March 1 – 25^th (1749 compared with 2860 for the same period in 2008)
• A year over year decrease of over 59% in Calgary Metro – Condominium listings added for March 1 – 25^th (755 compared with 1277 for the same period in 2008)
• A year over year decrease of over 77% in Calgary Metro – Single Family Home inventory for March 1 – 25^th (4,569 compared with 5930 for the same period in 2008)
• A year over year decrease of over 78% in Calgary Metro – Condominium inventory for March 1 – 25^th (2153 compared with 2741 for the same period in 2008)

With record low borrowing rates and increased affordability for home buyers, we are definitely experiencing a trend towards the return of a balanced market. Homes that are priced properly are selling quickly as consumers are realizing that they can now own their own home for about the same cost of renting. This trend in increased sales activity, combined with decreasing inventory levels will start to effect upward pressure on housing prices if it continues.

Are we close to a market bottom?