Here's when home prices will surge

There’s a good chance the Canadian real estate market could be headed back to its boom times.

Annualized average national home price increases are on pace to reach 6 per cent by the second quarter of 2020, according to a new report by Capital Economics.

But the report’s author says a shift in the sales-to-new listings ratio suggests price growth could accelerate even further.

One of the biggest reasons behind a pick up in sales has been a drop in mortgage rates.

“According to RateSpy, the average promotional five-year fixed mortgage rate available from the top banks dropped from 3.5 per cent in December to 2.5 per cent in August, before rebounding to 2.7 per cent in October,” said Stephen Brown, senior Canada economist, in the report.

“Assuming that a buyer is constrained by the size of their monthly mortgage repayments, the initial 100 bp reduction in mortgage rates raised the maximum house price that they could purchase by 10 per cent.”

This has been a big factor pushing up home sales, which are 8 per cent higher than the 10-year average, according to recent data from Teranet. That’s a dramatic change from February, when sales were 9 per cent below the average.

Supply has not kept up with demand during the run-up.

“With new listings only edging up, rising demand is feeding through to higher house prices,” said Brown.

One potential side effect of rising home prices for current owners is they tend to spend more.

“The Bank [of Canada] once estimated that households spend six cents for every dollar gain in the value of housing,” said Brown.

“If house price inflation averages 5 per cent next year that implies consumer spending will get a boost of up to 0.8 per cent of GDP.”

Brown says the wealth effect isn’t guaranteed, because people might just save more this time around. He estimates savings rates are up around 1 per cent. He also notes high household debt and a lack of savings has limited consumer spending, which will slow consumption growth from 1.4 per cent to 1.6 per cent.

“While lower mortgage rates will support the economy in 2020, policymakers will be wary that financial conditions may tighten again if they do not follow through with the 30 bp of loosening priced into markets for the next 12 months,” he said.

“That means there is still a decent chance of the Bank enacting an insurance cut at the next couple of meetings. But with the housing market on a tear again, the key message now is that interest rates are far more likely to be held near their current levels than lowered significantly.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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