Interest rates, HST help cool housing sales

Economists cite a shortage of first-time buyers as one of the key reasons for a sharp drop in housing sales in July, though the HST and rising interest rates also played their part.

It all amounts to bad news for sellers, but good news for buyers for the first time in nearly a decade. The Toronto Real Estate Board yesterday reported sales were down 34% last month from July 2009. New listings also took a hit, dropping to the lowest level for July since 2002.

Despite the lag, total sales for the first seven months of 2010 are still up 12% over the same time period last year. The average price of a house rose 6% from July of 2009 to $420,482 this year, though that is down from the average selling price so far this year of $432,253.

"There's more of a fall-off in first-time buyers, which suggests that affordability has dropped off a bit," said Adrienne Warren, senior economist with Scotiabank, before adding, "compared to what we've seen for most of the past decade, it's more favourable for buyers."

She expects a slower market over the next couple of years after one of the longest housing booms the city has seen in a decade. "I think it improves the longer-term housing market with a bit of cooling off," she said, explaining that prices were rising too quickly, and this kind of dip is healthy for the greater economy.

A survey of Royal LePage employees released yesterday suggests the sudden dip is partly the result of the HST. Almost half of their agents responded that the HST is to blame for the cooling housing market.

"Torontonians, along with other Ontario and British Columbia residents, are confused as to the full impact of this tax," said Phil Soper, chief executive of Royal LePage. "Many of them feel it applies on the entire purchase price of a resale home, which would entirely change the cash necessary to complete a transaction. But is it a primary factor in the decrease in activity? Not by a long shot. [The HST], given that it affects such a small portion of the transaction, is having a much larger impact than it should."

For much of the year, the federal government warned Canadians that interest rates would start rising in the late spring or early summer. Those warnings spurred a lot of people into signing fixed-rate mortgages, said Jason Mercer, senior manager of market analysis for the Toronto Real Estate Board.

The government's new mortgage-lending policies, which require all mortgage recipients to qualify for a five-year, fixed-rate loan even if they opt for a variable rate, also pushed many buyers into the market in the first quarter of 2010.

"What's going to cushion this downturn is the fact that we have a recovering economy as a backdrop," said Pascal Gauthier, senior economist with TD financial group.