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Plenty of room for house prices in Canada to rise as interest rates stay low

In what’s shaping up as a post-pandemic battle for talent, an Ontario company has a plan to harness the Canadian itch to get into the property market with a scheme to attract and keep young employees.

Friday’s jobs numbers will give us a better idea of whether the incentive is necessary, but Crozier Consulting Engineers says it is offering new employees $20,000 to make it easier to fight their way into an overheated real estate market that simply refuses to die.

We’ll get a reading on the state of the national market next week when the Canadian Real Estate Association comes out with its latest data on resale homes, but Crozier’s housing incentive is only one snippet of news this week that shows — to paraphrase Mark Twain — reports of the demise of the housing market have been greatly exaggerated.

“We have seen first-hand the increasing demand for residential development and the frustrating situations our employees find themselves in, such as extreme bidding wars, when trying to buy their first home in today’s market,” said Nick Mocan, president of the company based in Collingwood, Ont.

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Stoking the market

Before you rush to put your name in, some conditions do apply — as such offers always say in the fine print — including that the scheme only works for first-time buyers.

Similar to the federal First Time Home Buyer Incentive program, announced in the 2019 budget, it kind of helps boost the down payment for people, most of them young, struggling to get into a dog-eat-dog real estate market. Latest data from that federal scheme shows that nearly 11,000 people applied for shared equity mortgages, which represents more than $200 million in homebuyer support.

collingwood house for sale
Home prices in Collingwood, Ont., continue to rise as people from bigger cities look for affordable real estate — making it harder for local residents to break into the market. An engineering company in the town is offering new employees $20,000 to make it easier for them to buy a home. (Don Pittis/CBC)

But whether from an employer or from the government, while such incentives give individual recipients an advantage, overall they merely stoke an already hot market that just doesn’t seem to want to cool.

“It’s not really surprising because the cost of borrowing is still low,” said Samantha Brookes, CEO of Toronto brokerage firm Mortgages of Canada. “And as long as the cost of borrowing remains low, you’re always going to have a lot of activity in the market.”

And there is no question that interest rates are staying low. For those who fit the criteria, mortgage broker this week declared a new record low for a five-year variable rate mortgage of 0.98 percent. At that rate, a million-dollar house will cost you $10,000 a year in interest.

No wonder the Toronto Regional Real Estate Board (TRREB) upped its 2021 forecast for this year. Previously the board, which covers properties in the Greater Toronto Area, predicted there would be 105,000 transactions with an average selling price of $1.025 million. It has now increased that outlook to 115,000 sales at prices averaging $1.070 million.

‘Persistent lack of inventory’

However, that latest higher forecast is based on an exceptional run of sales at the beginning of the year — and sales are now expected to trend below those record levels, the group announced Tuesday. That said, TRREB market analyst Jason Mercer expects a shortage of houses on the market will keep prices high.

“A persistent lack of inventory across most segments of the market will keep competition between buyers strong, resulting in an average selling price well above $1 million through the end of 2021,” Mercer said in a news release announcing the latest data.

Just like statistics from the Real Estate Board of Greater Vancouver this week, sales were down month over month in Toronto. But Vancouver data shows they were still strong by other measures. Sales in Metro Vancouver were up more than 50 per cent from the depths of the pandemic, but more significantly they were 18 per cent higher than the 10-year average for the month of June.

housing dive vancouver
According to statistics released by the Real Estate Board of Greater Vancouver this week, house sales in June were down 11.9 per cent from May. But they were 18 per cent higher than the 10-year average for the month of June. (Evan Mitsui/CBC)

The debate continues over whether the continued buying frenzy, driven by low interest rates, needs to be controlled by tighter regulations to prevent a bubble that would pop once interest rates begin to rise.

But if the Canada Mortgage and Housing Corporation (CMHC), traditionally the country’s largest mortgage insurer, had hoped to use its clout to bring the market under control, that was reversed this week — one more potential boost to the market.

The housing agency announced last summer that it planned to raise its underwriting standards to require higher credit scores, lower debt ratios and a ban on borrowing money for a down payment if it was going to insure someone’s mortgage.

For those who don’t know, mortgage insurance protects the lender, not you, the mortgage borrower. By lifting its standards, the CMHC hoped to concentrate the minds of banks and other lenders, forcing them to lend only to those least likely to default in a future recession.

Private-sector competition

But this week, the government agency announced it was reverting to the old lower standards after private insurers Canada Guaranty and Genworth, now operating under the name Sagen, failed to follow suit. So borrowers simply switched from CMHC to its private competitors, resulting in a plunge in the federal agency’s market share.

A debate continues over whether the cause of rising prices is a shortage of housing or whether — as Bank of Canada governor Tiff Macklem has warned — it is increasingly driven by a rush to buy properties to take advantage of their rising value as returns on other safe investments stagnate.

From her experience, Brookes of Mortgages of Canada is one of those who believe the market is at least partly driven by new Canadians getting on the property ladder, but she sees an end in sight to soaring prices.

“This will not continue, I can guarantee you that much,” she said. “Because at some point, markets have to level out, and that’s going to happen once rates start to increase.”

WATCH | Tougher stress test makes it harder to get a mortgage in Canada:

armstrong mortgage.jpg?crop=1

As of June 1, Canadian homebuyers will face a tougher mortgage stress test. The new rules will make it harder to get into the housing market now, but could make it easier for others down the road. 1:57

But at the Collingwood engineering firm, Nick Mocan said that the company’s real estate incentive is paying off, allowing employees to be able to find a place to live near town rather than making long commutes. So far, nine employee have received the benefit, and he is certain it inspires loyalty. Other companies looking to find and retain staff may be taking note.

“The interest is rather overwhelming,” Mocan said.

Follow Don Pittis on Twitter @don_pittis

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