Housing Boom

Canada's housing boom will continue this spring as exceptionally low mortgage rates - and the expectation that borrowing costs will soon be headed higher - add a sense of urgency to consumer buying.

A Scotiabank global real estate trends report released Tuesday predicts most Canadian regions will remain sellers' markets for the first half of the year, as strong demand and rising prices continue.

"I think you're going to have a very active spring market, probably some cooling off in the second half of the year," Adrienne Warren, the Scotiabank economist who wrote the report said in a presentation Tuesday.

"We're looking at once in a lifetime interest rates that people are taking advantage of...but certainly confidence is coming back, the job markets are stabilizing," she said.

Scotiabank expects about 510,000 home sales this year, up ten per cent from 2009, but just shy of the 2007 record. Average prices are forecast to increase about eight per cent to a record $345,000, while housing starts are expected to reach 190,000, up from 149,000 last year.

The economic recovery from last year's painful recession has improved consumer confidence, although a bounceback in the jobs market is taking more time. Just over a third of the 417,000 jobs lost in the 2008-2009 recession have been replaced and the jobless rate is still at 8.2 per cent, only half a point below its high last August.

Most experts predict the rise in consumer confidence about the economy, and low interest rates, are behind the continued strength in the housing market.

Warren said the spring rush will be driven by an influx of buyers hoping to preempt tighter lending rules for mortgages and the introduction of the harmonized sales tax in Ontario and B.C. But a steady increase in the number of listings and a rise in construction are helping to restore a more balanced market.

"We're starting to see better balance, we're seeing more listings. There was a real lack of listings for the better part of last year...we're moving back into a better balanced situation," Warren said.

Warren said the hot spring market should give way to more subdued activity in the second half of the year, as higher interest rates and higher home prices erode affordability.

Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning in late spring or early summer to fight inflationary pressures in the economy.

Key Rate Unchanged

Canada's central bank held its key interest rate at a record low 0.25 percent on Tuesday and reaffirmed that it expects it will keep the rate steady until July. But the bank also signaled it is getting closer to raising rates.

The Bank of Canada said the 5 percent economic growth Canada saw in the fourth quarter was slightly higher than expected. It said growth has been "spurred by vigorous domestic spending and further recovery in exports" and cited low rates, increased confidence and global growth as reasons.

The bank said the persistent strength of the Canadian dollar and weak U.S. demand continue to act as significant drags on economic activity in Canada. About 80 percent of Canada's exports go to the United States. A higher Canadian dollar hurts exports.

But the bank said the risks to Canadian inflation are now "roughly balanced." Previous statements have said the risks were lower.

Some of Canada's top economists took the bank's changed assessment to mean rates will go up once the conditional commitment ends in July. The Canadian dollar strengthened almost a cent, to U.S. 96.80 cents after Tuesday's statement was released.

Avery Shenfeld, senior economist at CIBC World Markets, said the bank has taken the first steps to set up for a rate hike in July. He expects rates to rise as "as soon as the commitment to keep on them hold until the end of June has passed."

TD Bank chief economist Don Drummond said he thinks the central bank could wait until the September meeting and said he expects Canada to raise rates before the U.S. does.

Royal Bank Chief Economist Craig Wright also expects Canada to raise rates before the U.S. He said Canada's central bank is setting the markets up for an eventual move toward normalizing interest rates with its wording on inflation expectations.

"That to me suggests they are a little bit more worried than they were a short while ago but not enough to shake them off the conditional commitment," Wright said.

Unlike the U.S., Canada has not experienced the failure of any major financial institution. There has been no crippling mortgage meltdown or banking crisis north of the border, where there is greater oversight of mortgages.

The federal government tightened mortgage lending rules last month as historic low rates are raising fears of a potential housing bubble. Wright said some have taken the bank's vow to keep interest rates at an historic low to mean they will always stay that way.