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Canadian home sales and prices had another month of double-digit increases in February, prompting the country’s national real estate group to raise its forecast for the year and economists to warn of an overheated market.

Home sales were 39 per cent higher than in February of last year and the average home price was 25 per cent above last year at $678,091, with low mortgage rates, a desire for bigger properties and low inventory propelling the boom.

The Canadian Real Estate Association, or CREA, is now predicting home sales to reach 702,000 units this year, up 27 per cent from last year, while the average selling price is set to hit $665,000, up 17 per cent from last year. However, the association expects activity to cool in the latter half of the year and into next.

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The forecast for 2021 is significantly higher than the association’s December prediction for annual sales of 584,000 and average selling price of $620,400. The association credited an increasingly middle-aged millennial cohort entering the housing market for the spike in demand.

“Policy makers should be thinking about how to react, and soon before it gets dangerous,” said Robert Kavcic, senior economist with Bank of Montreal.

Mr. Kavcic said only a handful of measures are available to address what he calls a market that is “boiling,” such as finding a way to curb speculative buying and blind bidding, a common practice where homebuyers do not know what their competitors are offering and end up blowing past the asking price to the benefit of sellers and their realtors.

Other measures that could dampen housing activity include higher mortgage rates and stricter loan qualifications. But the Bank of Canada has said it will keep interest rates low until at least 2023 or until the job market and the economy fully recovers. Banks are already required to ensure that potential borrowers can pay their mortgages at a higher interest rate than the market rate.

“That would leave measures to contain speculative activity as the most direct and effective approach,” Mr. Kavcic said. “They could also look at how we buy homes in this country as a longer-term measure, given that blind bidding in extremely tight markets only pressures prices even higher with little transparency,” he said.

Sri Thanabalasingam, a senior economist at Toronto-Dominion Bank, also agreed the housing market is overheated.

In February, Bank of Canada Governor Tiff Macklem said the housing market shows early signs of “excess exuberance,” though he also said it’s not as hot as it was in Ontario and British Columbia in 2016 and 2017 when home prices in Vancouver and Toronto were rapidly increasing.

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But the pandemic’s housing frenzy has been at its height in the detached housing market, especially in the suburbs, semi-rural areas and smaller cities. Those areas in Ontario continued to experience the steepest price gains last month.

The home price index, which corrects for expensive transactions, rose more than 35 per cent year-over-year in the Lakelands area in cottage country, as well as the Tillsonburg area and Woodstock-Ingersoll. It was up in the 30-per-cent to 35-per-cent range in places such as Barrie, Niagara and the Simcoe area.

About 40 regions across Ontario, including Toronto, have less than one month of inventory as of the end of February, according to the CREA. Nationally, there was just under two months of inventory, the lowest level on record.

The real estate association predicted that activity would start to ease later this year and into 2022 with low inventory and higher prices making it harder for homebuyers to purchase property. Although the association sees prices continuing to increase into 2022, it sees sales falling 13 per cent, in part because of a shortage of properties for sale.

However, the recent turnaround in the condo market in downtown Toronto may offset any declines. With more of the Canadian population slowly getting vaccinated against COVID-19 and the economy gradually reopening, immigration is expected to surge and postsecondary students are expected to resume in-person classes later this year.

That means demand for housing in the Toronto region could ramp up even more. The condo market in the city of Toronto, which was flooded with units last year, started to rebound this year with condo rental rates and the average selling price reversing their downward trend in February.

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Davelle Morrison, a broker with Bosley Real Estate Ltd., said one of her clients is trying to buy a condo for their child who is a postsecondary student. She has seen a complete turnaround in the condo market. She said a few months ago it was “painful” to get a showing at a condo and now condos are selling before her clients can view them.

She does not see a cooldown in the latter half of the year and pointed to what will be a flood of immigrants, Canadian expats returning and the return of the international student.

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