TORONTO - Home prices will continue to rise this spring as buyers scramble to close deals ahead of expected higher interest rates, new mortgage rules and new taxes in two key markets.
A report by RBC Economics issued Monday found that the cost of owning a home in Canada increased slightly across all housing segments in the closing months of 2009.
Strong demand and a limited supply of homes for sale continue to drive prices up as more buyers engaged in bidding wars to secure the relatively few homes on the market, RBC said.
Demand has also been fuelled by exceptionally low mortgage rates, which are expected to start rising at mid-year, the report said.
RBC senior economist Robert Hogue said affordability deteriorated in the fourth quarter of 2009 and that the problem is likely to get worse with an anticipated rise in interest rates in the second half.
The Bank of Canada has pledged to keep its key overnight rate at 0.25 per cent, where it has been since last spring, until the end of the second quarter. But economists anticipate it will begin rising after that.
Historically low interest rates have been cited for the strong housing market, with sales of existing homes moving higher again in February and setting monthly records in both Ontario and Quebec.
The Canadian Real Estate Association said 36,275 homes were sold across the country in February, up 44 per cent from the same month in 2009, when the recession was still impacting both consumer optimism and loan activity.
But February's year-over-year gain was much smaller than in the previous three months, CREA said. Part of the reason was that February home sales were down in Vancouver as the Olympics impacted activity, even as sales in Toronto logged an equally large gain.
Overall, seasonally adjusted home sales were down 1.5 per cent in February compared with January.
CREA chief economist Gregory Klump said national sales activity has slowed while new listings continue to rise, which has contributed to a more balanced national resale housing market.
He added that strong resale housing demand continues to draw down inventories, but softer sales activity and an increase in new listings in recent months has helped slow the depletion of available properties.
"Housing markets are becoming more balanced," said Klump said. "There are still a number of major markets where sales negotiations favour the seller due to a shortage of inventory, but supply has begun rising.
"Further expected supply increases will continue to take the steam out of housing markets as the year progresses," he said.
Both RBC and CREA predicted that real estate markets in B.C. and Ontario will remain hot in the months prior to the introduction of the harmonized sales tax in both provinces on July 1, which will increase the transaction costs associated with a home purchase.
Douglas Porter, deputy chief economist at BMO Capital Markets, said that the increase in supply from ultra-low levels helps bring the market closer to balance, but added the still-tight market means that prices will remain high.
"(But) While Canada's housing market remained robust in February, there are encouraging signs that conditions are becoming more sustainable," Porter said.
He added that Ottawa's recent efforts to "release some steam from the market" will help slow activity, and "the housing market will pull up just short of bubble territory."
Finance Minister Jim Flaherty announced new mortgage qualification rules last month to discourage homeowners from taking out mortgages on homes they might not be able to afford down the road when rates return to more normal levels.
In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year, fixed-rate mortgage even if the period they choose is shorter and the interest rate they pay is lower.
