When housing boom meets rate-hike panic

Spring is typically a busy time for the real estate business, but this year may make others pale in comparison.

With new mortgage rules in effect April 19 that will make it tougher to borrow in some cases, the new harmonized sales tax (HST) in Ontario and British Columbia beginning on July 1, and the Bank of Canada likely to hike short-term interest rates, it's no surprise buyers are becoming panicked.

"It's extremely busy out there right now. There is clearly a shortageofproperties for salein many parts of the country," said Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada.

Numbers back that up. While sales activity in February dropped 1.5% compared with January, year-over-year sales for the first two months of 2010 were up 44.2%.

Low supply and strong demand continue to boost prices, with the average home selling for $328,440 this year, an 18.2% jump from a year ago.

In the Greater Toronto Area, figures for March released yesterday show the average sale price soared to $434,696, a 20% jump from a year ago. Sales in the GTA jumped almost 70% compared with last year.

In Vancouver, March sales were up 38.5% from 2009, while prices in the West Coast city are up just over 20% from a year ago.

Even Montreal, with its relatively cheap housing stock, is on the upswing. February sales in the city were up 45% from a year ago, while the median price of a single-family home in the area reached $245,000, a 9% increase from a year ago.

Inventory levels remain low across the country, even after three straight months of slowly building supply. In February, the Canadian Real Estate Association said there were 4.7 months of inventory in the system on a seasonally adjusted basis, based on the rate of sales. That was a near-record low.

Doug Porter, deputy chief economist with Bank of Montreal, said last week's interest rate hikes from the banks has turned up the heat on the spring housing market.

"When we first get a whiff of real mortgage rate hikes, it pushes any fence sitters," he said. "If anything, it will heighten an already strong spring market."

Gary Siegle, a regional manager for mortgage broker Invis Inc., said business has been "hectic" since the banks started raising rates last week.

"I would say volume was up 50% because of [the rate hike]," said Mr. Siegle, adding lenders have also been sending out word that anyone preapproved for a deal must have a signed offer by April 19 to avoid having to qualify under tougher new mortgage rules.

The new federal guidelines require anyone buying a home with less than 20% of the purchase price for a down payment to qualify based on the posted rate for a five-year mortgage, now at 5.85%. For terms longer than five years, consumers can qualify based on the actual rate on their contract.

"The new rules are going to absolutely disqualify some people but won't impact everybody in the marketplace," said Mr. Siegle.

But they do provide further incentive to get a deal done now.

Another deadline looming for home buyers is the arrival of the HST in Ontario and British Columbia on July 1, which will add about $2,500 to $3,000 to the average purchase.

Timing the housing market is always a tough game to play, but those who waited for this spring to buy are completely off their timing.

Lynne Engelman and Kevin Giddings know what that feels like. They have less than 120 days to find a home.

The Calgary couple won't be homeless if they strike out, but they will be without a near-record-low five-year mortgage rate. They were preapproved for the 3.69% guaranteed rate just before all the major banks jacked up their rates last week.

If they had to go to the bank today to borrow, the five-year rate would be more like 4.25%, and that figure is expected to rise in the next four months.

"We knew rates wouldn't continue to be at these all-time lows so I said, 'let's lock in and hopefully we can find a home,' " says Mr. Giddings.

"We've started looking. We found a place but ended up in a bidding war we didn't win."

If the couple doesn't buy a home in the 120-day period and end up facing higher interest rates, "it might change our decision [to buy]," he added.

Does an overheated spring housing market mean a possible crash come fall?

"There is a risk of [a greater fall]," said Mr. Porter. "I like to believe the underlying economy will have improved and help cushion the blow and the HST is only a factor in half the country. But there is an increasing risk that we are going to get a mini boom/bust."

Mr. Polzler also believes the inventory shortage this spring will ease up by then. "Things will slow down a little by fall."

(prepared by Garry Marr/National Post)