TARA PERKINS - REAL ESTATE REPORTER, The Globe and Mail - Published Saturday, Mar. 09 2013, 8:00 AM EST, Last updated Sunday, Mar. 10 2013, 6:56 PM EDT

With the spring selling season approaching, all eyes are on a crucial segment of the real estate market – the first-time home buyer.

It’s a group that includes people such as Tyler Padley and his wife Jamie McGovern, who have been renting in the west end of Toronto and are now looking to buy their first house and start a family. Like many prospective homeowners, they are struggling to find what they want at a price they can afford – even though they’ve saved up a sizable down payment. With the average home price hovering at around $510,000, they’re realizing they may have to settle for a place that’s smaller or further from the city’s core than they wanted – assuming they take the plunge at all.

Whether this couple, or others like them, choose to wade into the market will determine whether Canada’s housing market begins to recuperate or continues to weaken this spring. New entrants are a critical part of what makes the market tick: For every first-time buyer, there’s an owner who`s looking to sell and trade up, and for every upgrade, there`s a retiree looking to cash out. The “trickle-up” effect can make the difference between hot and cold in the market.

This year, the big question is: Will the first-timers come back? Many were driven away last summer by Ottawa’s new rules on home loans, which banned mortgage insurers from covering any mortgage with an amortization period of longer than 25 years. It was an effort to cool the market amid fears that house prices and consumer debt levels were growing at alarming rates, and it worked: Property sales have been sinking ever since.

Data from seven large cities suggest that last month’s sales nationally are about 12 per cent lower than a year ago, BMO Nesbitt Burns economist Douglas Porter said in a research note this week. “It still seems that the much greater risk is that sales weaken further, not that they surprise to the high side,” he wrote.

Prices remain stubbornly high in most urban markets. Fitch, a ratings agency, said this week that prices nationally are about 20 per cent too high. Such headlines add to the fear among first-time buyers that, even if they can afford to get into the market, now might not be the time.

It’s tough to gauge exactly how many first timers are staying away. “There’s no real hard statistics on the number of first-time buyers that are in the market,” says Shaun Hildebrand, senior market analyst in Ontario at Canada Mortgage and Housing Corp. But one of the ways the housing agency attempts to track it is to look at the share of sales that are below the median price. In Toronto, that was 45 per cent in 2012, down from 52 per cent in 2011, “so that’s one of the indicators that we use to suggest that first-time buying has slowed down,” Mr. Hildebrand says.

Another is the rental market: Canada’s most populous city saw more condos rented out over the Multiple Listing Service than sold over MLS during 2012, he notes. And the trickle-up effect is under way in that city.

“The first segment of the market to begin to slow was the lower end of the market, where first-time buyers tend to be a bit more active,” he says. “It then started to slow in the $400,000-to-$600,000 price range, the next step up. That range has kind of flattened out in terms of sales, whereas it was one of the strongest areas of the market in recent years.”

But “even though we’ve seen first-time buying reduced, it doesn’t mean that first-time buyers have been inactive,” Mr. Hildebrand says. Yes, many potential buyers are instead renting. But some are choosing to readjust their expectations and live in cheaper locations or smaller houses. For instance, more affordable areas in and around Toronto, such as Scarborough and Ajax, are attracting a larger share of buyers.

And with interest rates remaining low for a long period of time, it’s quite possible the housing market could regain strength once again. Experts such as CIBC World Markets economist Benjamin Tal are arguing that the spring season is likely to be stronger than expected.

“Market activity over the past two or three weeks seems to have been picking up quite nicely,” says Andrew Charles, CEO of Canada Guaranty Mortgage Insurance Co. “It hasn’t shown up in the February numbers, but I think you’re going to see it in the March numbers.”

Large marketing campaigns and incentives on the part of mortgage lenders are likely to play a significant role in driving the market this spring. “People buy payments, they don’t buy house prices,” says Toronto-based mortgage planner Calum Ross. “There is a huge psychological impact of five-year mortgage rates dropping below three per cent.” Mr. Ross adds that he’s now seeing “massive” amounts of marketing by mortgage lenders.

Mr. Charles at Canada Guaranty says he is now seeing more applications for mortgage insurance from buyers with a down payment of less than 20 per cent, suggesting the start of an uptick among first-time buyers.

David Resnick, who deals with financial institutions for Google Canada, said the number of searches for the word “mortgage” jumped by 50 per cent after Bank of Montreal cut the advertised price of its five-year fixed-rate mortgage from 3.09 per cent to 2.99 per cent. “That’s huge,” he said. “And home insurance searches spiked more than 80 per cent in the 24 hours following the announcement, suggesting that people are looking at actual purchases.”

Phil Soper, CEO of real estate agency Royal LePage, said the slowdown is a good thing, because the market was too hot, but he thinks that the changes that Mr. Flaherty made in July went too far. “It pushed things for young people, for first-time buyers, to a place it didn’t need to be,” he said.

Now, he says, the impact of the change has largely been felt. “Young people have had eight months to either save up a larger down payment or look farther afield for a home,” he says. “As long as the cost of mortgage financing remains very low, we’re going to attract financially stable young people, first-time buyers, into the housing market. The desire to own one’s home hasn’t changed one bit.”