07/10/2012 06:53 EDT | Updated 09/09/2012 05:12 EDT

Canada Real Estate Market At Tipping Point: Royal LePage


TORONTO - Canadian home prices generally rose in the second quarter and the pace of home-building increased in June, but industry observers say the real estate market is at a "tipping point" and could soon lose steam.

Royal LePage, one of the country's largest real-estate sales organization, said Tuesday that prices for all types of housing were mostly higher in the second quarter compared to both the first quarter of 2012 and the second quarter of 2011.

And prices will likely rise further in some areas, such as Toronto and Winnipeg, the real estate firm added.

But the report suggests some areas are now likely too expensive for buyers at the current levels.

And some of the local markets it tracks showed declines in the second quarter compared with a year ago. Some types of homes in some cities showed lower local average selling prices, such as those in Victoria, B.C., Moncton, N.B., and Saint John, N.B.

"Confidence in Canada's real estate market is sound, but home prices cannot grow faster than salaries and the underlying economy indefinitely," said Phil Soper, the president and chief executive of Royal LePage Real Estate.

"Some regions have reached or perhaps even exceeded the current upper level of price resistance as buyers have embraced an era of historically low mortgage rates."

Interest rates have remained at the current one per cent since September 2010, which has kept fixed mortgage rates low and helped to spur robust buying activity in the market.

But the Bank of Canada and the federal government have warned the low rate environment may have also encouraged some Canadians to take on more debt than they can afford when rates rise.

There have been numerous reports suggesting certain local markets — notably Vancouver and Toronto — and some kinds of housing, particularly condos, are overvalued and primed for a downward correction.

Emanuella Enenajor, an economist at CIBC, says slowing mortgage and consumer debt accumulation indicates that housing prices may dip about 10 per cent over the next year or so.

"Interest rates support demand for housing," said Enenajor. "However, rates are flat. They're not going down. They're stable. And the impact of those stable, low rates is fading."

As prices fall, it's likely that housing starts — which increased last month, particularly in urban areas — will also dip.

"Home builders will look at the prices and that could be a signal to them to slow down the pace of construction," said Enenajor.

Canada Mortgage and Housing Corp. said urban multiple starts, such as condos and apartments, helped housing starts rise to 20,327 units across the country last month, up from 18,494 in June 2011. On a seasonally-adjusted basis, the figure was up to 222,700, from 217,400 in May.

"To some extent it's a reflection of the reality that urban centres are where population growth is happening in Canada," said Enenajor.

"And urban centres are also land-constrained, so you're not seeing a lot of single home building, you're seeing a lot of multiples home building."

Royal LePage's survey found the national average prices for one-storey bungalows, two-storey detached homes and condominiums all went up in the April to June quarter from a year ago.

The national average price for bungalows was $376,311, up from $356,625 in the same quarter of 2011 and $356,306 in the first quarter of 2012.

The national average price for two-storey detached homes was $408,423, up from $390,163 a year-earlier and $398,282 in the first quarter of 2012.

The national average price for condos was $245,825, up from $238,064 in the second quarter of 2011 and $243,153 in the first three months of this year.

Soper said that changes to mortgage rules introduced by Finance Minister Jim Flaherty over the past four years will keep some people on the side-lines, particularly first-time buyers who account for up to half of the transactions.

Flaherty's latest changes — lowering the maximum amortization period to 25-years and reducing the amount Canadians can borrow against their homes — were announced last month and went into effect on Monday.

"The cumulative impact of these new regulations has created a significantly higher hurdle for young buyers seeking their first home and comes at a time when the market was slowing of its own accord. The timing of this intervention was unfortunate," Soper said.


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