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    « Another Reason to Love North Oakville – Glenorchy Conservation Area | Main | Queen Elizabeth Park Community Centre »

    How the Economy Effects Your Home

    I have to thank a client of mine for the inspiration to write this blog article.  The spotlight as we all know is on the economy.  Nowhere is this more apparent than the media attention being given to the ‘hot’ housing market. 

    Here are some common real estate questions that I am being asked with increasing frequency by prospective buyers and sellers.  I preface that the responses below are my opinion only.  If I had a crystal ball, I would use it to make my fortune and retire early but alas I am still sitting here. 

    1)      What is your gut feel on what will happen this summer after new mortgage restrictions have kicked in?

    To clarify, Finance Minister Jim Flaherty announced last week the following changes to housing market rules:  1)all new borrowers will have to meet standards for five-year, fixed-rate mortgages even if they’re seeking a shorter, variable-rate loan 2) The government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent 3) The government will now require a 20-per-cent down payment for government-backed mortgage insurance on “speculative” investment properties.

    My gut is that the mortgage restrictions aren't going to have a significant impact on the resale market in Oakville.  It may have a bigger impact on the Toronto condo market where there are more speculators affected by the refinancing and speculative down payment restrictions.  What the press didn't really publicize is that mortgage lenders were basing approval ratings on 3 year fixed rates prior to the new rules taking effect.  Changing the approval requirements to a 5 year fixed rate is not a significant leap given that most of the buyers I know aren't maxing out their qualification amount anyways.  A bigger impact would have been made if Flaherty reduced amortization or to a lesser degree, increased the down-payment rules.  Most first time buyers I know are usually putting more than 5% down but many take advantage of the longer 35 year amortization just to keep their monthly costs lower.  Regardless, Flaherty didn't touch amortization or down-payment requirements so this is a moot point.  From my perspective, the new mortgage rules do a good job of reducing the market swings that could be caused by speculators while maintaining the opportunity for credit-worthy buyers to purchase property.

    2)      What is your gut feel on what will happen this summer after HST is implemented?

     The harmonized HST which comes into effect July 1, 2010 will mainly affect service costs in the resale market (commissions to real estate brokerages, legal fees, etc).  In the new home sales market, HST will be applicable on any home over $400,000.  Purchasers of new homes valued between $400,000-$500,000 will be able to claim a proportional rebate on HST paid while homes under $400,000 will be exempt from the tax.

    Some realtors are worried that the HST rules are contributing to people's motivation to sell before the tax comes into effect.  I personally don't know anyone selling now to save on HST costs (it really only affects commissions, legal services, and other related closing costs).  I think HST is having a much bigger factor on the new home market which as far as I can see is going absolutely crazy right now.  There isn't a ton of detached new home sales in Oakville right now but when they do start selling off the land North of Dundas Street, I can see how it will be more difficult for developers to keep prices in line with resale prices given the new HST tax applicable to new home sales over $400,000.  If anything though, this should have a slight positive effect on keeping demand for resale homes high.

    3)      What is your gut feel on what will happen this summer after interest rates start to rise?

    The Bank of Canada has publicly announced that they will not raise the overnight lending rate until midway through 2010.  Mortgage rates tend to follow overnight lending rates and bond rates therefore, when the overnight lending rate starts to rise as expected in the back half of 2010, mortgage rates are also expected to rise.

    Interest rates should have the greatest effect on the housing market.  Typically the Bank of Canada doesn't raise rates more than 0.25% each quarter although I suppose the rate will ultimately depend on how strong our economy rebounds.  I think there is a lot of hype being written about the benefit of locking in rates right now which is motivating buyers.  I would expect demand to soften slightly in the back half of this year which in turn should reduce the rate of housing price increases.  The big BUT for me is that lower demand does not necessarily mean lower prices.  Unless we see another huge catastrophic economic event like we did in Q4 '08, I suspect that housing prices will continue to rise albeit at a slower rate than they are now.  Even with last year's economic crash, housing prices dipped for only a few months before rebounding.  During that period, I met a lot of people who were scared and feeling the pinch of the economy but there really weren't a lot of foreclosures/power of sales, etc.  People hung on to their homes to ride out the storm and if they had to move, many decided to lease out their properties so they wouldn't take a hit on the price.  

    Bottom line for me is that current demand is not sustainable but prices are.  Canadians have too much equity in their homes to walk away from them and while I have no evidence of this, the vast majority of Oakville properties are principle residences so the influence of speculators is much less than it is in say Toronto or Vancouver.  I'm working with a number of buyers right now and I have to say that some of the sale prices seem ridiculous given their comparables but these new prices are the comparables of the future.  There really would be no reason to think that a new listing would be worth less than a comparable listing recently sold unless demand somehow just drops off.  For this to happen, we would need to see a sharp, fast rise in interest rates (unlikely given the economy) or a significant new economic development (while domestic and foreign debt is to me a real long term concern, I don’t think it is an immediate threat to local housing prices).

    If you have questions about the local Oakville real estate market, I would love to hear from you.  I can be reached at or 905.338.9000.




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