Canada's housing market heats up, fears of correction in the air

Spring is in the air in Toronto. Temperatures are up, and so too are the city's housing prices.

New statistics show the average cost of a Toronto home is up 10 per cent over a year ago. The average detached home is now going for more than $500,000.

Compare that to a decade ago, when it was about $250,000.

Soaring prices have would-be homeowners fleeing the big city in search of something cheaper and bigger.

Heather Lemieux, a realtor with Royal LePage, knows that all too well. Mere minutes after listing a house in North York, she had her first showing. And she's finding a lot of her clients are turning to the suburbs where housing is more affordable.

"That's what I'm hearing. 'I can't find anything affordable. I'd like a garage, a driveway...a yard would be nice,'" says Lemieux.

Real estate prices in Toronto still pale in comparison to metro Vancouver, which has a notorious reputation for expensive housing. In that city, the average house price is $679,000.

Across Canada, prices are up more than four per cent over 2011, according to Royal LePage. They could go up another three per cent by the end of the year.

"Depending on what part of the country you're in, the first part of 2012 was either good or very good," Royal LePage president Phil Soper says.

"In fact, nationally, the market did exceed our expectations in the early weeks of the year."

Business shows no signs of cooling. Over in Calgary, John Mayberry of CalgaryRealEstate.ca echos Lemieux's sentiments. "I've been crazy busy. I've been in competing offers the last couple of weeks."

Royal LePage attributes the hot housing market to high consumer confidence and low interest rates. But as prices creep higher, so do fears of a correction.

Since 2009, the average Canadian home price has risen steadily to almost $350,000. That's in stark contrast to other world markets, including the U.S., where the average home costs just $175,000.

"When interest rates start to rise, people's ability to afford mortgages, tied to those high housing prices – that equation is just not going to work anymore," says Tsur Somerville of the University of British Columbia's Sauder School of Business.

That's when some economists predict prices will plummet – but not everyone, like Soper, agrees.

"But with the economy improving and continued low interest rate environment, it's hard to fathom a situation where we'd see a significant double digit price correction in our market," Soper says.

While that may be some relief to homeowners, it will only make things tougher for buyers.