The red-hot real estate market in Canada has to cool down some time, and economists say that time has come. Yet, the latest sales figures show sales continuing at a record-setting pace in the country's largest housing market, Toronto.

"We've reached unimaginable levels of activity since the fourth quarter of last year," says Ted Tsiakopoulos, market analysis for Canada Mortgage and Housing Corp. (CMHC). "The Toronto housing market will probably hit all kinds of records this year. But it's unrealistic to think the pace set in the first quarter can be sustained all year."

"The new home market strength is just incredible," says Sheldon Libfeld, president of the Greater Toronto Home Builders' Association. "There were more new homes sold in the first quarter of this year than in any given full year in the seven-year period between 1989 and 1995." Sales through the first quarter of 2002 were up 87 per cent over the first quarter of 2001.

"Sales continue to increase because buyers are seizing the opportunity presented by incredibly low interest rates relatively low prices and intense competition among builders," says Libfeld.

On the resale side, April was the first month in the 82-year history of the Toronto Real Estate Board that more than 8,000 sales were recorded in a single month. Prices continued to rise. The average price in April was $277,664, up 11 per cent from April 2001.

A new housing forecast from CMHC says that recent increases in Toronto housing prices have been mitigated by declining borrowing rates, keeping housing costs at historically low levels. The federal housing agency predicts that as the local economy improves, interest rates will rise and will no longer provide this cushion, particularly for first-time home buyers.

Tsiakopoulos says interest rates are expected to rise from 50 to 75 basis points by the end of 2002, which will be enough to cool the market off. "But even with the increases, the rates are historically still very low," he says.

"The rate increases won't put a big dint in the market, but it will cause it to slow slightly. CMHC predicts MLS sales will hit 74,000 this year in the Toronto area, up from 67,612 last year. New home sales are forecast to reach 48,000, up from 41,710 in 2001.

A report this week from Statistics Canada shows that housing permits issued nation-wide in the first quarter represented almost 53,000 new homes, up 30 per cent from a year earlier. It's the highest quarterly level since the first three months of 1990. But the agency says that March figures were down slightly from February, perhaps showing the first signs of weakness as interest rates start edging up.

Nonetheless, Statistic Canada says "the value of building permits, an early indicator of construction activity, points to a hot summer for home builders. The housing market has been booming across Canada in the wake of low mortgage rates, high consumer confidence, and the scarcity of existing dwellings for rent or resale."

Most observers have been surprised at how quickly the economy has rebounded after last year. Job creation and income figures in Canada were higher than expected, and the rise in interest rates was considered essential to hold down the rate of inflation. But with the rate hikes not yet having an impact on home buying activity, most economists have now boosted their forecasts for the resale and new home markets.

Libfeld says he's delighted with the sales figures, but advises potential buyers to be cautious. "Buy with your head, not your heart," he says. "Don't rush or get rushed, ask plenty of questions, and make sure you retain a lawyer to review the Agreement of Purchase and Sale before you sign it, not after the fact."

CMHC also cautioned that builders may have trouble meeting completion dates because of the high demand. But it says slower commercial activity may increase the pool of available labour, and so far labour and materials costs have not seen significant increases.

Published: May 9, 2002

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Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He is also consulting editor of Homes & Cottages, Canada's largest building and renovation magazine. Email jimhc@pathcom.com.