2005 is looking set to top last year’s mark for property resales, experts say
Derrick Penner, with files from Eric Beauchesne
Sun
British Columbia‘s real estate resale market will hit a record in 2005 before calming in 2006, the Canadian Real Estate Association is predicting in a revised sales forecast.
CREA chief economist Gregory Klump said the real estate market story is still dominated by low mortgage interest rates with a continuation of low rates expected to drive resales in B.C. to 102,600 by the end of the year, 6.4 per cent higher than the 96,385 resales recorded by the Multiple Listing Service in 2004.
He added that nationally, CREA is predicting a 1.1-per-cent gain from record 2004 sales, and that Alberta, Manitoba, New Brunswick and Newfoundland will also hit highs.
“Homebuyers in many markets across the country took advantage of mortgage interest-rate cuts in the second quarter of 2005, especially in British Columbia and Alberta,” Klump said.
In its earlier forecast, released this spring, the CREA predicted that home sales would decline from last year’s record.
Dave Barclay, president of the B.C. Real Estate Association, said the CREA forecast for B.C.’s real estate resales might be “a bit conservative,” and he disagrees that interest rates are the prime driving force pushing sales up.
“From a Canadian perspective that may be true,” Barclay said. “But in B.C., I think it’s more due to the strong economy.”
Barclay said increased demand for resources, rising international trade, high population migration to the province and rising wages are all combining to create a good climate for real estate sales in B.C.
Klump said that on a national scale, Canada has seen seven years of rising real estate prices, the longest run of consecutive increases recorded by CREA over the past 25 years.
In terms of consecutive annual sales increases, at five years the streak is the second longest on record, two years shy of the uninterrupted increases posted from 1983 to 1989.
And, unlike in the U.S., or during the previous 1980s housing boom in Canada which eventually went bust, there’s still no evidence of a housing price bubble in any Canadian markets that could burst, Klump said.
CREA recorded 8.2-per-cent growth in sales over the first quarter, momentum which extended into the second quarter and is expected to carry over into the third quarter.
“In addition, many homebuyers will jump into the market this fall to take advantage of pre-approved mortgage rates if the bank rate is hiked in September as widely expected,” Klump said.
It is widely expected that the Bank of Canada will raise its key overnight lending rate 25 basis points to 2.75 per cent when it meets next Sept. 7.
However, Barclay is doubtful that the bump in that key lending rate will have much of an impact on bank mortgage activity.
“Banks have been extremely aggressive at getting mortgage funds, so whether all that [increase] will be passed on to consumers, we’re not even sure,” he added.
Barclay also debates CREA predictions of a cooling of B.C. real estate sales. CREA is predicting that B.C.’s resales will drop 4.7 per cent to 97,800 in 2006. Nationally, the association believes sales will fall 3.3 per cent over 2005 figures to 451,000.
Barclay said the B.C. Real Estate Association is forecasting strong economic growth, with steady sales and house price increases for the next five years.
However, B.C.’s housing supply situation, the high debt levels of buyers and a significant investor component in the market are all risks that could dampen the market, said Andrey Pavlov, an assistant professor of finance at Simon Fraser University.
Pavlov does not believe the world’s central banks will have much appetite to raise key interest rates because of high energy prices.
“Even the U.S. [Federal Reserve] I don’t think is going to raise rates much [more] because they have a natural brake on the economy in high energy prices,” Pavlov said. “In Canada, that’s magnified by the strong Canadian dollar.”
What concerns Pavlov in B.C., and Vancouver in particular, is the province’s current boom in new housing construction.
Currently, the housing inventory is tight, he said, but at some point builders will complete the projects started by developers who sought to cash in on strong demand and high prices.
“Eventually there will be lots and lots of new units on the market, and the real question is, is income in B.C. going to grow at a fast enough pace to absorb all the supply?” Pavlov said.
He added that few people analyze the supply side when looking at the local market, although booming construction has had a dramatic effect on other world cities.
“Every major real estate market around the world has had a substantial — 10 per cent or 20 per cent or more — decline in prices for precisely the same circumstances: everybody is building as prices go up, and all of a sudden you have too much,” Pavlov said.
He added that investment buyers who are snapping up real estate with the intent of renting their properties could also be influencing the local market and driving the demand for additional supply.
Pavlov said that if enough investment buyers have difficulty renting their properties and attempt to sell, that could also help dampen the market.
He also worries about the amount of debt in relation to income that banks are allowing home buyers to take. Banks, he said, seem willing to let borrowers take loans with large loans relative to income, which leaves them vulnerable to any changes in their financial picture in terms of their ability to keep paying mortgages.
“I don’t want to be a pessimist, but there are those warning signs out there,” Pavlov said. “I just want people to think about them.”