Rising mortgage rates are fuelling home sales. They also appear to be curbing price growth as buyers drive tougher bargains.
The number of existing homes that changed hands across the country last month rose 18.2 per cent from a year earlier, the Canadian Real Estate Association said Tuesday. September's sales were slightly above the long-term average for that month, an indication that the market has fully recovered from the steep slump after Finance Minister Jim Flaherty tightened the mortgage insurance rules in the summer of 2012.
While sales were up just 0.8 per cent from August, the rise topped some economists' expectations and marked the seventh consecutive month-to-month gain.
But many experts claim that the increase in mortgage rates that has occurred since the spring, and the prospect of higher rates down the road, is providing a sales boost that will prove to be temporary.
Mortgage rates are up about three-quarters of a percentage point since May, with five-year fixed rates having risen to 3.39 per cent from 2.64 per cent, according to Alyssa Richard, chief executive of RateHub.ca.
With buyers facing higher rates, the market could lose steam in the months ahead.
"We expect home resales to stabilize near the current levels, although some modest pullback may occur later this year or early next as payback for sales that may have been advanced during the rush to lock-in lower rates," Royal Bank economist Robert Hogue said in a research note.
Greg Twinney, a senior executive at the e-book company Kobo, says mortgage rates played a large factor in his role to move his family from downtown Toronto to Caledon, north of Mississauga, this fall. He had been planning to move there some time in the next five years, but the combination of finding a property he liked and a lack of clarity over how much rates will rise spurred him to buy a house there last month.
"Given where interest rates are, you're able to get in to a home now and lock in interest rates and know what you're paying for the next five years and it's affordable," he said.
The banking regulator, the Office of the Superintendent of Financial Institutions, has long been considering tightening the country's mortgage underwriting rules, and could still take action.
Canadian Imperial Bank of Commerce economist Benjamin Tal has said recently that he suspects the housing market is currently too strong for the government's liking. But if the current momentum in sales does prove temporary, that could ease any fears that Mr. Flaherty might have.
Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals, met with Mr. Flaherty last month, partly in an effort to present the association's case that the market is in balance and no further tightening is required. "I think he's comfortable with where the market's at," Mr. Murphy said Tuesday.
Much of the concern that policy makers have had about the housing market in recent years has stemmed from rising consumer debt levels and home prices.
While the average price of homes that changed hands over the Multiple Listing Service last month was up 8.8 per cent from a year earlier, to $385,906, that's in large part because pricey cities, such as Toronto and Vancouver, were in the midst of steep sales declines a year ago.
The Teranet-National Bank home price index for September, released Tuesday, hadn't budged from August. The index normally picks up 0.2 per cent from August to September as buyers return from summer vacations.
"Price behaviour seems to be at odds with the recent pickup in resale activity," National Bank economist Marc Pinsonneault wrote in a research note. "It looks that households are willing to buy, but they are now bargaining harder on prices to compensate for higher mortgage rates."
Toronto-Dominion Bank economist Diana Petramala pointed out that a rising stock of unsold condos is also weighing on price growth. "Prices were down in Montreal and Ottawa where a growing overhang of condos on the market is keeping prices low."
Meanwhile, consumers who are wondering where mortgage rates will go next should look to Washington, says TD chief economist Craig Alexander.
Five-year fixed mortgage rates tend to follow the yields on five-year government of Canada bonds, because those influence banks' funding costs. Canadian bond yields tend to mirror those in the U.S. because the market views the securities as alternatives to one another. Mortgage rates rose over the summer as bond yields rose, largely because of expectations that the U.S. Federal Reserve would soon begin tapering its quantitative easing program.
That hasn't happened, and bond yields have edged down a bit recently as a result. But banks tend to change their mortgage rates only when they think yield changes will be relatively long-lasting, Mr. Alexander said.
"Over the entire course of next year, I expect the five-year yield to go from 2.05 to 2.55 per cent, so I think the balance of risks are that, in 2014, fixed mortgage rates will creep up a little bit," he said.