A further interest rate cut by the Bank of Canada could further fuel flames in the countryâ€™s two biggest real estate markets which are once again showing signs of overheating, housing watchers say.
â€œItâ€™s another log on the fire for the Toronto and Vancouver housing markets,â€ says economist Sal Guatieri, vice president of BMO Economic Research, who expects to see a cut next week in an attempt to kickstart lagging growth.
â€œItâ€™s not the amount that matters â€” the reduction in borrowing costs will be quite minimal â€” itâ€™s the message it sends to homeowners and potential buyers that rates are going lower rather than higher and will almost certainly stay low for quite some time. That just encourages more people into the market.â€
Both of Canadaâ€™s priciest cities are already swamped with far more buyers than properties for sale.
Sales â€” and prices â€” have hit new records in both Toronto and Vancouver this year. The frenzy has been driven by low interest rates, an ongoing shortage of listings and a growing sense of panic, especially among first-time buyers, that if they donâ€™t get in now, they will be locked out of the market forever, particularly the low-rise house market.
â€œWe are becoming concerned again about the possibility of a housing bubble in Toronto and Vancouver because prices are rising so much faster than incomes and because interest rates are continuing to fall rather than go up,â€ says Guatieri.
â€œWe were much more comfortable a year or two ago when both markets seemed to have cooled off a bit and prices were rising more moderately.â€
Both Toronto and Vancouver set new sales records for the month of June.
Almost 12,000 houses and condos changed hands last month across the GTA, up 18.4 per cent from a year earlier. The average sale price of a detached house was $816,583 â€“ and over $1 million in the City of Toronto â€“ up 14.3 per cent year over year.
Greater Vancouverâ€™s 4,375 sales were up 28.4 per cent for the same period. The average detached house was $1.45 million â€“ and a staggering $2.39 million for a stand-alone house in the core City of Vancouver â€“ up 20.2 per cent from June of last year.
Condo sales skyrocketed in both regions, up 22.4 across the GTA and 35.6 per cent across Greater Vancouver, year over year.
All that demand helped push up condo prices 6.3 per cent in the GTA, to an average of $390,894, and up 5.6 per cent in Greater Vancouver to $479,450.
Last Januaryâ€™s surprise Bank of Canada rate cut to .75 per cent has been a contributing factor to those escalating sales and prices, says Penelope Graham, editor and spokesperson with mortgage comparison site RateSupermarket.ca.
A cut to .5 per cent, as is expected, would see the five-year fixed rate dip below the current low of 2.39 per cent and further boost the illusion of affordability, she said.
â€œThere are more people now entering the market with just five per cent down, because thatâ€™s all they can afford. There is a real sense of urgency in the bigger markets to get in now, before itâ€™s too late, and get in with what you have,â€ says Graham.
â€œThatâ€™s potentially putting people in a really vulnerable position in terms of their debt levels.â€
Toronto realtor David Fleming says heâ€™s seeing a surge in demand even for condos â€” especially under $400,000 â€” and younger buyers than ever, backed by low interest rates and help from their real-estate rich baby boomer parents who want only the best for their children.
â€œIâ€™ve seen a serious culture change. Young buyers used to be 26 or 27 years old. Theyâ€™d graduated university, worked for a few years and lived at home then rented and bought. Now buyers are cutting out those middle steps.â€
Heâ€™s seeing first-time buyers as young as 22 determined to own rather than rent. And heâ€™s hearing from people who stepped to the sidelines three or four years ago, thinking the much-talked-about bubble was about to burst.
Instead, theyâ€™ve watched prices climb further out of reach: Back in June of 2012, the average sale price of houses and condos combined across the GTA was $508,622. This June, the average sale price was $639,184.
Where the average sale price of a condo in the sought-after City of Toronto was $364,597 in June of 2012, last monthâ€™s average was $418,599.
That was up seven per cent just over June of last year as bidding wars and bully bids â€” long the hallmark of the highly competitive low-rise house market â€” have pushed up prices for well-located, unique or larger condos seen as sound investments and house alternatives for the longer term.
â€œThatâ€™s a testament to the froth in the house market,â€ says BMO economist Guatieri.
â€œSo many people are now priced out, they have no other alternative than to get into the condo market, and thatâ€™s pushing up prices, even though there is ample supply.â€
Apart from the oil-impacted markets of Alberta, Saskatchewan, Newfoundland and Labrador, Canadian house prices are holding up well and consumer confidence appears to be strong, even in the midst of growing talk about a possible recession.
â€œNone of my clients are talking about the Big R word,â€ says Toronto-based mortgage broker Jake Abramowicz.
â€œTheyâ€™re confident that rates will stay low for a very long time now and that the market â€” both condos and houses â€” will not correct anytime soon.â€