The Globe and Mail – Sales and Price Surge Due to Consumer Confidence and Low Mortgage Rates

Sales of existing homes in August grew by a brisk 18.5 per cent from a year ago, data released by the Canadian Real Estate Association (CREA) showed yesterday. The average price climbed 11.3 per cent from a year earlier.  On a monthly basis, however, there was a slight drop in sales from July to August, at a fraction of 1 per cent.

Still, with unemployment up to 8.7 per cent, and the spectre of deflation existing, how can housing sales enjoy such a boost?

“We’re really double dipping here,” said Benjamin Tal, a senior economist with CIBC World Markets Inc. “Not only are we enjoying the healthiest financial sector globally, therefore a financial sector that is able and willing to offer credit, also consumers are able to accept this credit … it’s all about consumer confidence.”

Without that confidence, Mr. Tal said, buyers would not be poised to take advantage of record-low interest rates, which have driven the recovery.  “If I don’t have confidence that I will have my job tomorrow, you can offer me a 0-per-cent mortgage and I will not take it,” he said. “If you know your job will be there, you jump on it. That’s what’s happening. People know this will not last forever.”

Pent-up demand from the sales slump last fall may explain some of the gains, said Bank of Nova Scotia economist Derek Holt, but low mortgage rates are the dominant factor.

“I think that’s having the effect of putting people into homes at an earlier stage than would have otherwise been the case,” Mr. Holt said.

But he questioned whether mortgages could remain this affordable in the long term. Lenders may have offered “excessively generous financing terms” in their rush to build up product to put into the Insured Mortgage Purchase Program offered by the federal government, he explained in a research note released last week with fellow economist Karen Cordes.

That could be driving the kinds of astonishing gains seen in B.C. in August. Vancouver alone saw sales rise 117 per cent year over year.  “I do worry, longer term, not even that far out – two or three years from now – once short and long interest rates are probably higher … whether a lot of those mortgages will be as easy to carry as they are right now,” Mr. Holt said.  “The kind of strength we’ve seen of late isn’t necessarily sustainable.”

Mr. Tal agreed that the market will likely slow when interest rates rise again.

“Are we stealing activity from 2010, 2011? Yes, I think so,” he said. “We’re getting out of the bunker and we’re seeing that there’s light … but after the initial excitement, the real estate market of 2010 will be a very boring place, a much more relaxed place.”

Even accounting for attractive rates, it is still surprising to see sales numbers surge so much compared to 2008, and earlier, said Tsur Somerville, a housing economist at the University of British Columbia.  The question is whether a spate of good deals on mortgage rates could mean Canadians are getting in over their heads.

“I don’t think that’s a reasonable fear,” Prof. Somerville said, adding that the supply of capital and tolerance for risk seen in the U.S. ahead of the crisis there isn’t a factor here. “People buying things they can’t afford” is not a worry here. Although unemployment is very high, those with no jobs or marginal prospects are not the ones buying houses, he added, meaning a surge in sales is still possible even amid a slow recovery.

But growth cannot continue indefinitely, Scotiabank’s Mr. Holt said.

“I do believe there are downsides coming to Canadian housing in the next couple years,” he said, but added that Canada’s mortgage market is structurally different from that of the U.S., preventing a similar crisis from coming here.

For now, the increase in sales and prices – improved demand in the most expensive markets pulled the nationwide price average up 11 per cent from August, 2008 – is simply a correction from the downturn, Mr. Tal said.  “We are now rebounding.”

Source: The Globe and Mail


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