Transactions are dropping, but the median cost of homes in Montreal is increasing

Daniel Smyth

March, 2011

The 2011 real estate market is expected to slow down. Sales transaction numbers are expected to be more like that of 2008 and not be like the amazing year we had in 2010.

In January 2011, compared with 2010, the number of sales transaction in the greater Montreal area dropped by 10 per cent; specifically single family homes (down 11 per cent), condos (down eight per cent) and plexes (down nine per cent). Despite the reduction in sale numbers, the median price of plexes and homes in Montreal increased by seven per cent each, while condos rose only four per cent. However, compared with other areas in Canada, Montreal is still a very affordable city to live in. Just look at Calgary: The median price of a single family home there is 55 per cent higher than that of Montreal ($252,000).

Concomitant with the changes in sales, new government regulations, commencing in March 2011, are expected to have an effect on the real estate market in Canada. These changes are directed at safeguarding the Canadian economy by slowing down the rapidly growing real estate market and reducing the growing level of household debt.

These changes include: 1) the shortening of the amortization period from a maximum of 35 years to 30 years; 2) the refinancing of homes at 90 per cent was reduced to 85 per cent; and 3) lines of credit secured by homes will no longer by backed by Canada Mortgage and Housing Corporation. The first two changes will be implemented on March 18, while the last change will begin April 18.

Those most affected by these changes will be first-time home buyers. Approximately 30 per cent of these buyers in Canada use the maximum amortization period of 35 years to qualify for a mortgage. In Quebec, a smaller percentage of these buyers use the maximum amortization period, so it may not affect this province as much as the rest of Canada.

Furthermore, interest rates are expected to increase, also making it more difficult for about 10 per cent of households. However, the remaining households appear to be able to absorb an interest rate increase. Rates are expected to increase between 0.75 per cent and one per cent by the end of 2011. Existing mortgage holders or second-time homebuyers will be less affected and not every household in Canada will be reapplying for a new mortgage in 2011.

Taking into consideration that sales decreased by 10 per cent in the first month of 2011 vs. 2010 but inventory has increased by 13 per cent, it is not surprising to see signs of the market slowing down this year. It is when inventory is low that prices tend to soar with demand. Also, the anticipation of interest rate increases coupled with new government regulations to mortgages caused a surge in buyer activity prior to April 19, 2010. So the overall market in Canada is expected to soften slightly in 2011 but still favour the seller. Average sale prices in 2011 are expected to increase by about four per cent compared with 2010 but the market is expected to be more balanced.