There is a resurgence of new house and condo building, claims Canada Housing and Mortgage Corporation. CMHC has given a small pickup in new home construction a big spin. What a slight recovery in construction really means is boom times for the market for existing homes.
In a mid-November release, CMHC said that 157,700 home were built in October on a seasonally adjusted basis, a 5.4% increase from September. More homes on the market should be a sign of revival, but this little renaissance has to be balanced with the other side of the coin.
Manitoba housing starts from January to October 2009 were down 25% from what they were in the same period a year earlier. For Winnipeg, the comparable year to date data show starts down 31%. The headline revival really means not that the new housing market is thriving, but that it is less damaged than it has been.
In Winnipeg, home sales numbers declined slightly in October, but the dollar volume of sales was up from October 2008. Insulated from national trends by the diversity of our economy, Winnipeg offers a window of opportunity for both home buyers and home sellers. We have the advantage of low, national interest rates, housing prices lower than the national average, and a fairly strong provincial economy.
For buyers, interest rates remain at record lows at the short end of the yield curve, a connect-the-dots line that links interest rates from one day to 30 years. There is a prospect that rates will begin to rise in mid-2010. That’s when the Bank of Canada has said that it might begin pushing them up.
For now, buyers have a good change of scoring a bargain. The amount of home one can get when mortgage rates are low is large in comparison to what the same principal and interest payments will buy when interest rates are higher.
With new home starts down, there are obvious bargaining opportunities for sellers. A low level of housing starts means potential buyers must shop relatively more intensely in the existing home market.
Andrew Allentuck
What’s more, existing home sellers, who usually don’t have the marketing muscle of developers marketing tracts of new houses and condos, need not worry too much about discounting their prices to match the developers’ come-ons. There are fewer come-ons in this market, after all.
The sweet spot for both buyers and sellers of existing homes will last until there is a revival in new home construction. That depends on improvement in the underlying economy, especially a decline in the level of unemployment. Buyers without jobs can’t get financing, after all.
Low interest rates and reduced new-house inventories make this a good time to sell your house
Currently, the unemployment rate in Canada is 8.6%. It is not expected to decline much in coming months, says Scotiabank Economics. National employment fell by 43,200 jobs in October. The revival of stock markets in Toronto and around the world is not yet reflected on Main Street where, if you want a job, the recession isn’t over.
The window of opportunity to score a bargain in an existing home or to get a fair price for selling one will last as long as interest rates remain low. Today, banks are making floating rate mortgage loans for 2.15%, depending on what deal you can make. These rates are still near historic lows. You can also lock in a rate at 2.25% for one year, 3.8% for three years, and 4.6% for five years at a typical chartered bank.
Rates are not expected to begin to rise substantially until mid-2010, suggests Michael McHugh, vice president at Dynamic Funds in charge of bond investments.
Even then, the increases in rates are not likely to be dramatic. Add one per cent to the current rates for an idea of what the rate structure will be by mid-2010, he suggests. Barring an unexpected rise in inflation that the Bank of Canada would fight by raising short rates and that the bond market would fight by raising yields, the outlook is for the entire structure of one- to five-year mortgages to stay below 5% for the next year.
That leaves inventory levels of new, unsold homes as the swing variables in setting the market tone.
CMHC data suggests that in the national market, the 157,300 units started in October, well below the 175,000 to 200,000 level needed to pace population growth, will remain the norm until the national economy returns to health. Until that happens, sales of existing homes will thrive.
Homeowners should probably not pray for bad news, but in a market in which the supply of new homes is reduced, the prospect for selling existing homes is relatively good. Until more new housing comes on the market, sales of existing housing should be robust and pricing relatively strong. And with interest rates low, buyers can afford to spend a little extra. It’s sweet indeed.
Andrew Allentuck's latest When Can I Retire? Planning Your Financial Life After Work, was published earlier this year by Penguin.
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