EVERYBODY'S WELCOME

Low rates to keep house party going
Eric Lam
Financial Post  May 30, 2011

With the Bank of Canada now widely expected to hold off on a rate hike until the end of summer, house prices in Canada are likely going to stay hot for a few months longer.

The central bank will again leave its benchmark lending rate unchanged at 1% at its regular policy announcement on Tuesday, according to the unanimous result of 22 economists surveyed by Bloomberg News.

With signs the U.S. and global economies have entered a soft patch and the European debt crisis continuing to roil, most economists do not expect the bank to raise its overnight target rate until at least September. That would mark a full year on hold for the bank, which last raised rates in September 2010.

The upshot is, these ultralow lending rates will continue to a fuel a Canadian housing market that appears in full spring bloom. Average prices hit $372,544 in April, up 8% year over year for the third straight month, led by a supercharged Vancouver market.

"It will lead to more strength in housing in the near term than anticipated, and the slowdown in housing will be more of a 2012 story," said Derek Burleton, deputy chief economist at TorontoDominion Bank, in an interview.

TD and economists at Royal Bank of Canada and Bank of Montreal have recently pushed their expectations for a hike back to September. TD and Royal forecast the rate to settle at 1.75% by the end of the year, while BMO does not expect it to rise past 1.50%.

Mr. Burleton figures homes are at least 10% overpriced. Extending a low-borrowing environment into the prime sum-mer shopping season would encourage more prospective buyers to take the plunge, creating even better pricing opportunities for sellers.

However, Phil Soper, chief executive of Royal LePage Real Estate Services, said recent price increases have been driven by intense foreign investment in Vancouver, especially from newly cash-rich investors from China, and not low interest rates.

"Much of it is concentrated in a few neighbourhoods, which have attracted Asian investors who use largely cash," Mr. Soper said. "Also, there just aren't enough homes for sale in Canada right now. An increase in the cost of buying would not impact the supply side at all. In general, the pent-up demand for housing that grew during the recession has been exhausted."

Data from Re/Max Canada showed that 747 homes in the Greater Vancouver Area sold for $2-million or more between January and April 2011, a 118% increase on 2010, the biggest increase by far. To compare, 435 homes sold for $1.5-million or more in the Greater Toronto Area in the same time period, a 9% increase on 2010.

"When you take Vancouver out of the equation, the rate of house price appreciation is cut in half," Mr. Soper said.

Doug Porter, deputy chief economist at BMO Capital Markets, agreed that Vancouver has skewed averages.

"We aren't calling for a massive correction on the market, but Vancouver is a market unto itself, and it's certainly at risk of a full-fledged correction in the years ahead," he said. "But most other major markets don't seem to have broken from fundamentals. The likely outcome is a long period of subpar increases or flatness for prices."

Mr. Burleton said even the small rate hikes forecast for the end of the year are unlikely to have much of a material impact on the economy.

"I don't see the impact being dramatic. We're really talking about a quarter difference here, and part of the Bank of Canada's job is being done by the high Canadian dollar, so there's some wiggle room," Mr. Burleton said. "There's a good likelihood the increase next year will be accelerated to some extent to make up for some of the lost ground this year. Most of the action on the interestrate front will happen in 2012."