From fizzle to sizzle

Low mortgage rates and attaractive home prices fueling real estate surge

What a difference a year makes. It wasn't long ago that the sheen on Canadian real estate dulled considerably as the global economic down-turn and financial crises took their tolls, curbing home sales and pushing prices down. Low mortgage rates and other factors, however, are helping turn that trend around.

According to statistics compiled by The Canadian Real Estate Association (CREA), home sales reached 147,351 units in the second quarter of 2009, the fourth highest quarterly sales volume ever. On a seasonally adjusted basis, sales increased by a record 31.5 percent over the first quarter of 2009.

Dale Ripplinger, president of The Canadian Real Estate Association, said "Statistics for June show that the number of sales is up, the number of listings is down (inventory fell from a peak of 12.9 months in January to 4.2 months in June) and average price is up. Current mortgage rates are having a huge impact on affordability and desirability."

Karen Leggett, head of Home Equity Financing at RBC said, "We believe the low rate environment and overall housing affordability, which improved across almost every geographic region of Canada, have been the single largest contibuting factors in keeping people in the market despite a difficult economic environment.

Although unemployment rates have been higher than we've seen in a long time, it's been an opportune buying time for people who have some level of quaranteed employment or a reasonable expectation that employment will continue," she said.

"We did a survey in January that indicated many Canadians thought it was a buyers' market and buying intentions would be strong. The spring proved to be a great time for first-time homebuyers to get into the market, and that's where we saw the early move-ment," said Ms. Leggett.

"More recently, we've seen a stronger rebound in resale activity by repeat buyers. We've actually seen some bidding wars in certain price ranges."

Chris Wisniewski, group product manager, Real Estate Secured Lending at TD Canada trust, has noted an increase in refinancing activity as well.

"Other than purchasing a home, the top reasons for taking on a mortgage tend to be renovations, debt consolidation or purchases of large assets; in the renovation market, there are a number of grants available and this year's Home Renovation Tax Credit," he said. "We've seen activity on both the prurchase and refinance side of the business."

RBC did not tighten its credit guidelines through this economic recession, said Ms. Leggett. "But our outlook is that the recovery may take some time. We did see some deterioration in people's finiancial affordability profiles, with job losses and lower stock markets. We've started to see that rebound, but we don't expect the recovery to happen overnight."

Whatever the market, she advises, the best strategy for homebuyers remains the same: "Get pre-approved, not pre-qualified. Actually get a firm, free approval in hand from your lending institution in order to truly understand what your affordability factor is.

"People get into trouble when they've taken on more debt than they can technically afford," she added. "Understand your comfort level: get some advice."

Early June brought higher mortgage rates for the first time in 2009, and those with pre-approved mortgages found themselves in an advantageous position. "By getting pre-approved, you lock in for 90 to 120 days. If rates go down, most financial institutions will give you the lowest rates that occured during the period of time your rate was locked in," said Ms. Leggett.

"In addition to the guidance provided by your lender, it's still essential to take an honest look at your individual situation," said Ms. Wisniewski "A pre-approval should not be a substitute for a reasonability check. Ask yourself: Can I live with this payment? If this payment is larger than the one I'm used to making, am I prepared to make the changes I need to make?

"The most popular terms continue to be five-year fixed rate and five-year variable rate mortgages," she said. "It's a matter of your own risk tolerance: If rates were to go up, do you have the cash flow to sustain an increased payment? Can you sleep at night, or will you worry?"

In an uncertain environment, mortgage features that provide flexibility are particularly attractive. "The ability to double your monthly or weekly payments, for example. gives you that added flexibility to lower your overall borrowing cost over time. Features such as a skip-a-payment option allow some flexibility to manage finances through difficult times," said Ms. Leggett.

Rental rates continue to rise across Canada, said Mr. Ripplinger, making home ownership an affordable alternative. "Most Canadians still prefer to have the freedom of owning their own property. As long as you're not spending more than you can afford, my advice is to buy property as soon as you can. You'll be glad you did."

Source: The Globe and Mail