Climbing rates and new taxes have housing market bubbling
Garry Marr
Sun
Kevin Giddings and Lynne Engelman are hoping to find their dream home before their pre-approved 3.69% guaranteed rate expires. Photograph by: Greg Fulmes, The National Post, Financial Post
Lynne Engelman and Kevin Giddings 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 pre-approved 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,” said Mr. Giddings, who financed his first home with a variable-rate mortgage that now has a rate of 1.45%.
Rising interest rates on the long end are just one more catalyst for a spring housing market expected to reach a feverish pitch.
Throw in new mortgage rules that go into effect April 19 which will make it tougher to borrow in some cases, a new harmonized sales tax (HST) in Ontario and British Columbia and a likely Bank of Canada hike in short-term interest rates as well, and buyers are getting panicked.
“We’ve started looking. We found a place but ended in a bidding war,” said Mr. Giddings, who is looking to upgrade to a larger house, but isn’t desperate to buy. If the couple doesn’t buy a home in the 120-day period and face higher interest rates, “it might change our decision,” he added.
Inventory levels remain low across the country, even after three straight months of supply trickling up. 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. Sales activity in February actually dropped 1.5% compared with January, but year-over-year actual sales for the first two months of 2010 were up 44.2% from a year ago.
Low supply and strong demand continue to goose prices, with the average home selling for $328,440 this year, an 18.2% jump from a year ago.
Doug Porter, deputy chief economist with Bank of Montreal, said the latest interest rate move on the part of the banks has exacerbated the situation. “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, regional manager with Invis Inc., said the mortgage market 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 the word that anyone pre-approved for a deal must have a signed offer by April 19 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 downpayment 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,” says Mr. Siegle.
But they do provide further incentive to get a deal done now.
Another deadline looming for home buyers is the addition of 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 there is no question that if you have waited for this spring before deciding to buy, your timing is off.
But does an overheated spring housing market mean a possible crash come fall?
“There is a risk of [a greater fall]. 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,” said Mr. Porter. “But there is an increasing risk that we are going to get a mini boom/bust.”
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