February is just another example of how each month continues to be better for the Toronto real estate market and why the country seems to be coming out of a recession. In fact, many economists feel that the entire country is coming out of the recession based on the fact that the real estate market is doing so well. If not for the surging real estate market, the entire country would still be in a recession like the economy of the United States.

 In new figures released by the Toronto Real Estate Board, the month of February was very good, with sales of homes in the area surging ahead by a full 77 percent over February of 2009. In addition, the average home price rose by 19 percent. That may not seem like much but it is actually an increase of $70,000 to $431,000. This just shows how well the market is doing compared with 2009.

 It is important to note that the housing market today versus last year is very different. For the first half of 2009, the housing market in the Toronto area was doing horrible and housing prices were very low. The housing market did not begin to rebound until May and even then it took time for the market to recover. Only now are housing prices reaching the levels they were at pre-2008 when the housing market was setting records. It is also very easy for the market to be higher than it was last year because the prices and sales were so low this time last year.

The real strength of the housing market will be seen in June of this year. In June 2009, the housing market was improving and begin to surge forward, and in June of this year, the interest rate is going to go up. This means that home prices and sales will probably level off or even fall slightly, and that will put the housing market more in line with what it was in 2009. This does not mean that the housing market will collapse, but it will level off and the double digit increases in home prices and sales will probably slow.

No other place has a greater lack of homes in Canada than Toronto. Currently, Toronto leads the entire Canadian market for lack of listings.

In January 2010, there were 41 percent fewer homes being listed when compared with January 2009.

 In a survey done by ReMax, it was found that 81 percent of the markets across Canada have shown a big decrease in listing, with Toronto leading the way.

Next to Toronto, Saskatoon has the largest drop in listings between January 2009 and January 2010, with 37 percent fewer listings. Third place goes back to Ontario with Kitchener-Waterloo who had a 33 percent drop in listings between the two months. Victoria and Ottawa saw a drop of 30 percent, while Vancouver had a drop of 27 percent.

 In Toronto, many buyers are looking at new developments in order to buy homes so that they do not have to get into the bidding wars created by sellers selling their own homes. Homes sales in Toronto doubled in January compared with January of the previous year. In January 2010, there were 2,162 houses and condos sold, which was an increase of 237 percent over January of 2009.

 In the Greater Toronto Area, the York region saw the biggest increase in sales with sales going up 385 percent, while the City of Toronto had an increase of 289 percent, while Peel Region had an increase of 259 percent.

 In Toronto, developers are working had to bring more homes to market because of this disparity. Home prices are reaching the levels seen during the height of the real estate boom, which has many wondering about the possibility of another housing bubble. However, with new mortgage rules and the increase in the interest rate in a few months, this is unlikely to happen.

More sellers are coming onto the market as well, which should drive down the prices of homes in the coming months. More people are confident in the real estate market now, and that should make it easier for sellers to take the risk to sell a home, plus many want to take advantage of the high prices homes are going for.

 To prevent this, the government of Canada is making it more difficult for individuals to get a home if they cannot afford it. The new policies are coming into place on April 19, 2010, with some major new rules coming in.

The new rules put in place by Finance Minister Jim Flaherty are:

1. All borrowers must meet the standards to have a five-year fixed-rate mortgage, even if they are getting a shorter term mortgage with a lower interest rate.
2. The maximum that a homeowner can withdraw when they are refinancing their mortgage will go down by five percent from 95 to 90 percent of the value of their home.
3. A minimum of 20 percent down is required on all mortgages in order to qualify for government-backed mortgage insurance. This means on a $400,000 home, a down payment of $80,000 will be required.
4. The number of years that a mortgage can run for will have a maximum of 35 years now, rather than 50 years like has been seen in past years.

 These rules are planned to protect the Canadian housing market from another bubble. With these rules, only the individuals who can afford a home will be able to get a home and there will no longer be people trying to take advantage of low interest rates but then finding they cannot afford the home anymore when the interest rates go up. The only problem is that it does not protect against a bad economy that causes people to lose their jobs. When someone loses their job, they end up going into foreclosure often, and that can create a housing crisis no different than if someone buys a home they cannot afford and is then foreclosed upon.

 Will this protect the housing market? Time will tell.

 For the first two weeks of February, the Toronto real estate market saw 3,555 sales through MLS. This represents an increase over the same period in 2009 of 74 percent, which is a huge increase for what is generally a slow time in the real estate market. It is important to also point out that February 2009 was a very low point for the real estate market so any increase is a big increase. However, that doesn’t mean this is not a great increase. In fact, the mid-month sales for February in Toronto is 7.7 percent above the previous record that was set in 2006 when the real estate market was surging to heights never seen before.

In the City of Toronto itself, there were 1,430 sales, which is an increase over the 816 sales done during the first two weeks of 2009. Home sale prices also went up in the City of Toronto, from $400,467 to $471,958.

For the rest of the Greater Toronto Area, there was an increase in home sales from 1,228 to 2,125 and home prices went up as well from $341,013 to $401,760.

For both the City of Toronto and the Greater Toronto Area, there was an increase in home prices of 18 percent to $429,997. The number of new listings in the Greater Toronto Area also increased by 15 percent to 6,212 homes now on the market.

 It is expected that for the rest of the first quarter, and into the second quarter of 2010, home sales and home prices will increase. There are two reasons for this. First, there are more buyers than sellers on the market and the laws of supply and demand drive up the price of homes. Second, the first and second quarters of 2009 were the lowest in decades, so seeing an increase in 2010 is not going to be that difficult to achieve.

Once the interest rate increases in June, the real estate market should begin to slow down, especially with the new mortgage rules that are now in place on the real estate market across Canada.

For one, you probably decided to be careful with spending. This may not be a time to buy a new cottage, take a long vacation abroad, and buy expensive jewelry.

Secondly, being wise with your investments is a safe strategy. No risky stocks or investments in uncertain emerging markets. If you already have a condo, you may consider carefully before investing in a second one to rent.

 All the over the news, the words ‘economy’ and ‘fragile’ seem to go together. Any unexpected event can send the markets into a tailspin.

 However, these are also times of renewal. These are the times when innovation is greater, when future titans of the economy are formed. GE, Disney, HP and Microsoft are only a few of the companies that started during a major recession.

 Having cash on hand will put you in a position to be able to grab bargains in the real estate and the stock market, when the time comes. Or even buy a business.

 72% of predictions are wrong. Therefore let’s admit that at this point it is impossible to predict what will happen with the Canadian economy and real estate market.

 However, prudence is the way to go, as well as staying liquid and keeping our eyes open for opportunity.

 The last major winter, 80 years ago, was around the market crash of October 1929. In one week, the stock market lost more than 50 percent of its value. Leaders of the stock market have intervened during that week, trying to stop the collapse by buying a large part of the securities with which the market was inundated. The free fall stopped and slowly, until March 1930, the market recovered half of what it had lost. However, at that point the market lost its foot again and it slid continuously for the next 2 years, until the Dow reached such low levels like there haven’t been seen since the 19^th century.

 Will the history repeat itself again? There are some similarities so far. The stock market crashed in 2008 and lost about 50 percent of its value. Then it started to pick up and by now it recovered about half of what it had lost.

 What would make the market continue to grow? How can we create the value that would fuel that growth? It will be difficult.

 Real unemployment in the US is above 20% (you may recall that the official numbers only count those actively looking for work – the rest are known as ‘hidden unemployment’ and are not reported in statistics).

 10 million households in the US are in negative home equity position (i.e. their property values less than what they paid for it) and if they paid little or no down-payment, then there is no incentive for them to hold on to that house.

 On the positive side, the US government may spend further trillions of dollars to create jobs and stimulate the economy.

 Additionally, the situation in Canada is more stable and a major drop in the US may not translate into a crash here.

 Which of these factors will weigh more?

 Being prudent in these times is the way to go.

 Next post: is it all bad news, or is there opportunity as well?

 Modern macroeconomics rejects the idea of supercycles, but it is interesting to note that the theory is the centre of the largest dissident group within economics, groups that includes prominent economists, and which is respected by respected business people.

 Each cycle has four seasons: winter (depression), spring (growth), summer (acceleration) and fall (plateau).

Supporters of the theory indicate that the last cycle extended more than usual to 80 years and the fall phase occurred in the nineties and the start of the first decade of the new millennium. Consequently, what we experience now is the winter phase.

 Regardless of other drops in real estate prices that occurred within the supercycle (e.g. early ‘80s), a winter phase always affects the value of the real estate.

 How much longer will this winter last? According to the insiders, until 2016 – 2020.

Which begs the question: if the theory is correct, is it a bit early to see a sustainable growth in real estate prices?

 CIBC has recently predicted a coming second dip in real estate prices in the United States of 5 – 10%. Almost 2 million mortgages are more than 90 days delinquent and according to history, most will end up foreclosing.

 If that happens, it will validate the hypothesis that the winter of the supercycle will last a few more years.

 Next post: Is the growth we see in the economy and real estate prices in the past months sustainable?

In a report released this past week, the new housing price index rose by .4 percent, which are the same increase seen the month before and exactly what the experts were predicting. Most experts saw the increase being .3 percent, so the country is doing better than thought. The rise in December was also the sixth straight increase in new home prices.

 Across Canada, 21 cities were analyzed and only two saw declines during December. These two cities were Calgary and Victoria and both saw a fall of .2 percent. Across the water from Victoria, Vancouver saw a .7 percent increase in the new home index. The rest of the big gains were in the eastern part of the country. St. John’s, Oshawa and Toronto all saw .7 percent increases, while Ottawa led the country with an increase of .8 percent. The reason that Ottawa is doing well is because of the excellent market conditions and the high amount of competition in the area. In Toronto, the increase was seen because many builders were revising the value of their models and increasing their prices thanks to the strong market conditions.

 The largest year-over-year increases were seen in Quebec City, which was up 6.9 percent for the year. St. Johns came in second with 4.6 percent, while Montreal saw an increase in 2.1 percent. In Western Canada, things were not as great. In Edmonton, there was a decline of 9.4 percent, while Calgary went down 3.1 percent. Saskatoon fell two percent and Victoria fell by 8.2 percent. While Vancouver has seen record gains from the tough months of 2008, just like Toronto, it saw a drop in home prices of 2.2 percent in total.

 As we go through 2010, home prices will continue to rise and the housing market will continue to recover in markets like Toronto. Once June comes around, it may be a different story as the record low interest rate is increased by the Bank of Canada. At this point, the housing market will either increase into the fall, or it will collapse in an epic housing bubble. Only time will tell which of these realities will come into being.

It was announced this week that the Competition Bureau was unable to reach an agreement with the CREA. The problem is that the biggest purchase a consumer will make in their lifetime is a home and with MLS, consumers do not have enough of a choice in their homes and they are not given the opportunity to lower cost options. The Bureau wants to challenge the rules put in by the CREA which has complete control of MLS in Canada and since most of the transactions are done through MLS, this gives the CREA a lot of power in the real estate market.

 Currently, real estate agents are not allowed to offer consumers the option of paying a fee for the agent to list a home on MLS. Instead, they must purchase predetermined sets of services through CREA. The Bureau wants to get rid of these rules so that real estate agents can provide consumers with innovative services and so consumers can have more choice in their home. If the anti-competitive rules put in place by the CREA are removed, real estate fees will go down and homes will become more affordable for consumers.

 Naturally, the CREA feels that its rules are not anti-competitive and they do not agree with the findings put forth by the Bureau. The CREA has stated that there has been a misunderstanding in the way the Bureau understands the MLS.

 In late-2009, there was a real estate agent who set up a service for consumers to list their homes online but he faced a cease and desist from the CREA. Through a lengthy legal battle, his claim that he should be allowed to provide consumers with an alternative was struck down, allowing the CREA to continue with its monopoly on the housing market listing service.

 There seems to be more and more pressure on the CREA to allow more competition with MLS given that housing prices across the country are at record high levels. This makes it harder for people to get the homes they want because of higher real estate fees in place.

Time will tell who wins this battle that shows no signs of slowing down.

So, who do we believe then?

 According to Mark Carney of the Bank of Canada, it should be them. He recently said that there is no housing bubble and there is no need to change anything in the mortgage market. The heads of the banks want to have more money down on a home and shorter mortgage term lengths in order to weed out the people who may be spending beyond their means.

Speaking in Winnipeg, Carney said that the market is doing very well over the past decade and the strength of the system of mortgage insurance has been witnessed during this time. Carney also said that the increased strength of the housing market was completely expected and that the bank is looking at the market closely.

 Regardless of how the housing market is doing, in June the Bank of Canada will be raising the .25 percent prime interest rate. When this happens, homeowners will find that they are paying much more for their mortgage each month and that may put too much strain on some people. If that happens, and if there are too many foreclosures, then there could be a mortgage meltdown like which was seen in the United States.

 However, over the next few months the housing market will continue to improve and grow, with record increases over the previous year being seen. In Toronto, there has been double, and triple-digit, growth in the housing market since June and this will continue for a few months more. What happens after June is not known. Many think the housing market will slow, others think it will continue to grow, while some think that the market will collapse. All we can do now is prepare for the worst and hope for the best and wait to see what exactly is going to happen.