Real estate markets are pumped

Canadian real estate sales and prices are poised to set records this year, according to a new forecast which is bound to reignite calls in some quarters for tighter lending rules.

The Canadian Real Estate Association, which represents 100 boards across the country, said Monday it expects existing home sales to reach 527,300, a 13.3% increase from a year ago and a 1.2% increase from the record high set in 2007.

The new home market appears to be picking up steam too. Canada Mortgage and Housing Corp. said there were 186,300 starts in January on a seasonally adjusted annualized basis, the highest level of new construction since October, 2008.

Bank of Canada governor Mark Carney has warned about rising levels of household debt, which is reaching record levels. Finance Minister Jim Flaherty has suggested he's prepared to tighten mortgage requirements and continues to monitor the market.

"One of the legitimate concerns of the finance minister might be if you make qualifying for mortgage default insurance prematurely restrictive that it will quell housing activity even as erosion in affordability continues," said Gregory Klump, chief economist with CREA.

There are have been some rumblings that the government is considering new rules that would require buyers who need mortgage insurance to have at least 10 % down and amortize their mortgage over just 25 years instead of the current 35 years. Anybody with less than a 20 % downpayment must get mortgage insurance, if they are borrowing from a financial institution governed by the Bank Act.

Klump's group believes the market is going to correct on its own in the second half of 2010. CREA has called for sales to drop by 7.1% in 2011. The group says that while prices will rise by 5.4% in 2010, to an all-time high of $337,500, they will drop by 1.5% in 2011.

Elton Ash, vice-president of

Re/Max of Western Canada, said he thinks the forecast put out Monday was a little optimistic for 2010, specifically the 4.2% price increase for British Columbia. "But I also think the market will be better in 2011 (than CREA)."

Ash is actually in favour of some measures to cool the market, like reducing the amortization period back to 25 years. But he wonders whether increasing the downpayment will take some people out of the housing market.

"I think leaving it at 5% would be okay," said Ash.

(prepared by Garry Marr/Canwest Services)