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Unique Toronto Homes

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Condos in Toronto

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Toronto Real Estate

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Tag Archives: Toronto area

Mortgage fears drive up Canadian home sales

Tara Perkins – The Globe and Mail

Fears of higher mortgage rates are driving strong sales in a housing market that was on the ropes just a year ago.

August sales numbers hint at a Canadian market that has “shades of taking flight again,” said Bank of Montreal economist Sal Guatieri. But observers suspect the upward trajectory will ultimately be flattened by rising rates, which have prompted many buyers to jump in sooner than they otherwise would have.

Comment: Maybe. Rising mortgage rates are only one possible component of the July & August surge in home buying we have seen. Bad spring weather pushing back sales, buyers saving more, rising employment, you name it. There is no one single factor that is driving the recent upswing.

The Toronto area saw a 21% jump in the number of existing homes that changed hands last month, compared with a year earlier; Vancouver a 52.5% surge; Calgary 27.5%; Victoria 20.7%; and Edmonton 9.9%.

The average selling price of Toronto-area houses rose 5.5%. The MLS Home Price Index, which adjusts for changes in the types of houses that are selling, gained 3.7% in Toronto, but was down 1.3% in Vancouver. The benchmark price of a single-family home in Calgary climbed by 7.4%.

“I would definitely say it has to do with [mortgage] rates,” Liam Kealey, a real estate agent with Re/Max in Ottawa, said of the 6.5% increase in sales in that city last month, which was above the five-year average.

Vancouver’s home sales were slightly below the city’s 10-year average for the month of August, while the 7,569 homes that sold in Toronto during the month came in above that city’s 10-year average of 6,977.

Jamie Brow, a 24-year-old business owner, and his girlfriend Kerry Tait, a veterinarian, have been looking in Scarborough, Ont., for their first home since July. Their pre-approval for a five-year mortgage at 3.19% will run out around the end of this month. They put in two offers for houses in their price range, under $500,000, in August, but both sold for much more than they were willing to pay.

“We’d like to use the rate we’ve been given and get something soon,” Mr. Brow said, adding that he is resisting the urge to overpay for a house just to lock in his low rate. “I don’t want to buy a house for over market value.”

Comment: There is no such thing as “overpaying”. Once a house sells for a certain amount, then others on that same street start selling higher, with the cycle reinforcing itself over time. It is rare for one to sell for way over what the rest sell for. The next seller sees what they got, then prices their house appropriately. Buyers see the last sale and know what the comparables are. Just say it is too much, or over your budget, overpaying is simply not really possible.

Last month’s mortgage-rate hikes have “caused a surge of people who were sitting on the sidelines to sit up and take notice,” said Mr. Brow’s mortgage broker, Calum Ross.

He added, however, that it’s important for buyers to do the math and not pay $25,000 more for a house to preserve a mortgage rate that saves $10,000. The 60-basis-point rate increase that has occurred of late would add an additional $2,400 in after-tax payments per year to a $400,000 mortgage, Mr. Ross noted.

Comment: But if they don’t buy a house today, then next month they will cost more, and their rate will be higher. Waiting too long just ends up with higher prices and higher rates. And that $25,000 more for a house only adds $122.35 to your monthly payment, which is $1,468.20 in a year. So, actually, paying $25,000 more to keep the lower rate actually does make financial sense – it will save you almost $1,000 in a year. Regardless, don’t rush to buy something just because your pre-approval is about to expire, that is silly.

Because pre-approvals tend to be for four months, those that were for less than 3% will be running out around October, said True North Mortgage broker James Laird.

“If you’re thinking of purchasing in the next six months to a year, and you have pre-approval at 2.8%, there’s clearly some incentive there to pull the trigger,” he said. But he noted that five-year mortgage rates remain well below their historical average.

Comment: Certainly! If you went from 2.8% to 3.54% on a $400,000 house with 5% down, your payments would rise from $2,166.29 to $2,315.99 – a rise of $149.70 per month. Not a ton of money, sure, but that is $8,982 over the 5-year term. Who wants to waste 9 large for no reason?

While rising rates are pushing people into the market now, rates will ultimately act as a drag on the market, said Toronto-Dominion Bank chief economist Craig Alexander. “We’re going to see it cool off again as the higher mortgage rates actually have a bite,” he said.

Comment: Maybe. Monthly cost of ownership has risen from $2,355 in 2008 (in 2013 adjusted dollars) when the average price was $379,347 and rates were around 4.95% to $2,869 today (with prices at $513,000 and rates at 3.54%). So it costs the average buyer $514 a month more today than it did 5 years ago, but sales are 10,000/year higher. Heck, just August alone saw 7,569 sales vs. the 6,318 in August of 2008 – a 19.8% increase. So I am not too worried about mortgage rates rising a bit. We would need a good 3% rise, 300 basis points, to see a similar cost-per-month increase. And that increase did not slow the market down, it saw an almost 20% hike in sales and almost 33% higher prices. Honestly, I have no idea what will slow things down, truly I don’t…

Mr. Alexander expects five-year rates will rise by about one-half of a percentage point next year, further tempering activity. He is forecasting relatively flat sales for a lengthy period, which would weigh on house price increases.

Comment: Which means a rise in monthly costs of around $132 or so on the average property.

“Flat is ultimately the best outcome we could have in the market,” Mr. Alexander added. “It’s not terrible for sellers, but it’s also good for buyers. And the fact that prices should rise more slowly than incomes should ultimately reduce some of the overvaluation that is present in some of the markets.”

August’s year-over-year sales numbers are also getting a boost from the fact that the market was plunging last summer. It was in July, 2012, that Finance Minister Jim Flaherty tightened the mortgage insurance rules, including cutting the maximum amortization of an insured mortgage to 25 years from 30, which led to a steep slump in sales.

Canadian Imperial Bank of Commerce economist Benjamin Tal said his sense is that activity in the housing market right now is too strong for the liking of policy makers. At the moment, the rebound in the market has spurred house price growth that is rising more quickly than consumer incomes.

Comment: The average Canadian income in 1967 (I only have housing stats to 1966 and this was the closest year income data was available) was $22,094 in 2013-adjusted dollars and $46,000 today. That is a rise of 108.2%. In 1967, the average Toronto house price was $162,857 in 2013 dollars, today it is $503,094 – a rise of 208.9%. So yes, housing prices rose faster (but I am comparing Toronto prices to national wages, not quite a proper comparison, though the only data I have at hand). Mortgage rates were 8.05% in August of 1967 and 3.54% today. Which means that mortgage payments were $1,366.84 (@20% down) in 1967 and $2,396.46 today – a rise of only 75.3%! So, monthly costs rose at 75.3% while incomes rose 108.2% over the past 46 years. Sure, total prices rose faster than incomes, but the monthly cost – the money people actually pay – has risen SLOWER. This is why price-to-income ratios are moot, it is monthly-payment-to-income that matters more.

The federal Office of the Superintendent of Financial Institutions, which regulates banks, is in the midst of a lengthy review of the mortgage market and is considering tightening the rules for lenders.

Comment: They did tighten rules for lenders. They can only insure $350 million worth of mortgages per month, a new cap.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.

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