TORONTO - Francesca Asante-Frempong, a self-described "late bloomer," believes buying her first home at age 35 will have been worth the wait if economists are right about dwindling competition and ultra-low mortgage rates persisting into 2012.
"It's encouraging to know that, as far as being able to afford something, any time from now would be a good chance to do that," the newlywed said in an interview from England, where her husband is living until they find a home.
Asante-Frempong, a registered nurse in Toronto, says she's optimistic she can take her time searching for an affordable starter home in the city, one of Canada's hottest and most expensive real estate centres.
And the likelihood that mortgage rates will remain low well into next year means she doesn't have to rush out of her parents home and into a bidding war, she added.
"I think that at least, although I didn't invest in a condominium say four years ago, I'm ready to go right into a house where my friends (who did) may not be able to at this point."
First-time homebuyers like Asante-Frempong are poised to comprise an even bigger proportion of real estate activity next year. Sales and prices are expected to stabilize as demand from owners intent on upgrading while mortgages are cheap dries up after more than two years of stimulative interest rates.
Low overnight lending rates at the Bank of Canada — which have been at one per cent since September 2010 — affect variable mortgage rates and other loans tied to banks' prime rates. Meanwhile, government debt crises in Europe and the U.S. are keeping fixed rate mortgages at ultra low levels by depressing the bonds that back them.
Mortgage rates had been expected to rise in 2011, increasing the cost of home ownership and keeping house prices in check. That was supposed to lead to a slowdown in the housing market, according to the predictions of several top economists at the end of 2010.
They were wrong. Now they believe that easing is coming in 2012.
A looming economic slowdown, tepid wage growth, unaffordable home prices and record consumer debt levels could put downward pressure on the market next year.
But those troubling signs, as well concerns about the domestic impact of turmoil outside Canada's borders should also push the Bank of Canada to leave interest rates on hold, fostering a friendly environment for home buyers.
Downsizing baby boomers, new household creation driven by a maturing Generation Y and a steady stream of immigrants are also likely to stimulate healthy demand.
However, economists project activity will moderate from the surprisingly robust levels seen this year.
Many predicted home price appreciation would be tempered by economic indicators that pointed toward slower income growth and weak consumer confidence this year, said Julie Ades, an economist at the Conference Board of Canada.
"These factors suggested that the market would cool this year, which would have led to slower home price growth," she said.
"But it didn't happen."
Instead, home prices for the first 10 months of the year have risen 7.8 per cent year-over-year, according to the Canadian Real Estate Association.
Gregory Klump, CREA's chief economist, hypothesized last year that 2011's housing market would be summarized in one word: "boring." Looking back, the description he now uses is "volatile."
Home buying behaviour in 2011 was at odds with consumer confidence, which indicated record debt levels and a potential downturn in the economy would curb appetites for major purchases.
"Ultimately, it's not what they said, but what they did; and what they did was they went out and bought more homes," Klump said.
One of the most surprising aspects of the market — which led CREA to upwardly revise its forecast several times — was the frothy activity in Vancouver's high-end home market during the opening months of the year, Klump said.
An influx of foreign investment drove Vancouver average home prices up as much as 25 per cent year-over-year to nearly $900,000, skewing the national average home price higher.
But perhaps even more surprising was that robust activity in Vancouver, Toronto and other hot markets, did not drop off nearly as much as expected after the Finance Minister introduced new mortgage rules in March, Klump added.
Lowering the maximum amortization period and increasing the down payment on an investment property were part of Jim Flaherty's third move to curb risky borrowing in as many years.
Bank of Canada governor Mark Carney also repeatedly issued warnings to Canadians this year that piling on debt could sink the worse off households into bankruptcy in the event of sudden interest rate hikes or an economic shock.
It appears that those official warnings have been no match for the lure of a cheap borrowing environment as recent Statistics Canada data shows average household debt in Canada hit a new record high of almost 153 per cent to disposable income in the third quarter.
Low interest rates have kept buyers competing for homes and driving prices higher — a dangerous scenario based on overly confident investment behaviour, according to David Madani, an economist at Capital Economics.
"This could turn around on a dime, and I think a lot of it is predicated on the expectation that house prices will continue to nudge higher and that will compensate people for the additional debt."
The stronger than expected housing market this year only fuels the possibility of a collapse in prices, Madani warned.
"We're even more nervous one year later about the Canadian housing market," he said.
"Trying to predict a turning point is obviously tricky, but we don't think that this level of activity in the housing market is sustainable."
A recent report in The Economist suggests Canadian homes are 29 per cent overvalued, rising at one of the fastest paces, 6.2 per cent since last year, among the 20 countries surveyed. Since 2007, prices are up 22 per cent, it determined.
And the extended low interest rate "does add a little bit more fuel onto an already hot fire," Madani said.
But he predicts buyers and sellers could reach a pivotal stand off as soon as 2012 because households can only borrow so much before demand is exhausted — and an interest rate hike isn't the only trigger for a sudden downturn.
Just as "irrational faith" has helped to buoy the housing market this year, the "animal like herd mentality" that took a toll on stock markets this year and exacerbated the U.S. housing crisis in 2008, could take over in the Canadian housing market.
Madani predicts 2012 will be characterized by the "shattering of blind faith in ever-rising house prices."
He predicts about 400,000 homes will be resold next year, a much greater fall than CREA's projected 0.5 per cent decline to 451,200 homes sold.
CREA —which has yet to release home sales data from November or December — projects sales this year will be up 1.4 per cent from 2010, to 453,300 homes.
But even CREA's optimistic Klump acknowledges there are downside risks that could lead to a broader slowdown in the housing market.
"If Canada gets dragged into recession by economic and/or financial market developments beyond its borders, certainly that could really squash consumer appetite to take on more debt and so with it the demand for resale housing," he said.
On the other hand, he added, just as economists were wrong about a slowdown this year, there could be more charge left in the market, due to a continuing low-interest rate environment.