February looks to have been another red-hot month in Canada’s housing markets, and as the bidding wars and price hikes pile up, some market observers are trying to cool the temperature a little.
The market “is far from risk-free,” RBC Economics warned in a report issued Tuesday.
Last year’s predictions of a housing downturn may have proved wrong, but now “the main near-term risk is overheating, not price collapse,” economist Robert Hogue wrote.
“Super-strong demand is quickly depleting inventories across the country. Competition between buyers is extremely fierce in many markets (including smaller ones), and a ‘fear of missing out’ is taking hold. Such dynamics often lead to self-reinforcing price trends.”
Watch: The most in-demand types of homes during COVID-19. Story continues below.
The risk of an overheated housing market is that it forces prices up far higher than what can be justified by market conditions, he says.
“The market then becomes highly vulnerable to a correction or crash when some event (e.g. bad economic news, a rise in interest rates or some policy announcement) causes bullish sentiment to turn bearish,” Hogue wrote in an email to HuffPost Canada.
The RBC report landed as local real estate boards across the country began reporting their February sales numbers. Data for most markets isn’t in yet, but Greater Vancouver posted a stunning 73-per-cent jump in home sales, to well above normal levels for the month, while Calgary recorded a 62-per-cent jump in home sales.
“Metro Vancouver’s housing market is experiencing seller’s market conditions. The supply of listings for sale isn’t keeping up with the demand we’re seeing. Competition amongst home buyers is causing upward pressure on home prices,” said Colette Gerber, chair of the Real Estate Board of Greater Vancouver, in a statement Tuesday.
Calgary’s real estate board also declared the city a seller’s market.
“Much of the strong sales activity is expected to be driven by exceptionally low mortgage rates,” Ann-Marie Lurie, chief economist at the Calgary Real Estate Board, said in a statement.
“Confidence is also likely improving as vaccine rollouts are underway. Additionally, some of the worst fears concerning the energy sector are easing with recent gains in energy prices.”
Vancouver’s benchmark price for all housing types rose 6.8 per cent over the past year, to $1.068 million. Calgary, which has seen hardly any house price growth in recent years, clocked a 3.8-per-cent increase in its price for all housing types, to $431,100
It’s a different story in Ontario, Quebec and many smaller cities in Canada, most of which have yet to report their February numbers but clocked double-digit price growth in January, driving up the average resale price by 23 per cent in a year, to $621,525.
In many of these markets, house prices grew by more in the past year than the average household earned, Bank of Montreal noted recently.
RBC’s Hogue says some markets in Ontario and parts of Quebec “are most likely overheating already though other markets aren’t quite there yet.”
Mortgage rates on the rise
In his report, Hogue lists plenty of potential pitfalls for the housing market going forward, including continued high unemployment, which could undermine the housing market if it lasts past the end of government support programs.
And if current low levels of immigration were to continue, that could put downward pressure on the market as well, Hogue wrote.
But the most immediate issue could prove to be rising mortgage rates, which appear already to be on the way.
Interest rates on government debt ― which are tracked closely by mortgage rates ― have spiked in recent weeks, and at least one major Canadian lender ― TD Bank ― has already increased its rate for five-year fixed mortgages.
“It’s not a matter of if, but when at this point,” said Justin Thouin, founder of mortgage comparison site LowestRates.ca, in a statement Tuesday.
“It’s easy to be lulled into thinking that rates will stay this low forever. But consumers who are renewing their mortgages or getting ready to buy need to understand that rock bottom mortgage rates won’t last forever. And we predict the next moves are going to continue to be upward.”