What is forecast to happen to Canada’s housing market? It’s all looking good
Not so fast. The purported collapse of Canada’s housing market does not appear to be in sight, and any correction down the road could likely be a mild one.
Recent data have defied warnings from market watchers of an impending plunge – caused mainly by the impact of tighter mortgage rules imposed by the federal government last summer to slow the race by consumers for record-low lending rates.
The latest figures show sales of existing homes strengthened for a second month in May, up by a seasonally adjusted 3.6 per cent, after declining 10 per cent between July and March.
The Canadian Real Estate Association, in a report Monday, also said home prices were up 3.7 per cent in May from the same month a year earlier, to a national average of $388,910.
For all of this year, CREA pegs the average price rise at 2.1 per cent, to $370,900, weaker but far removed from correction territory. And in 2014, the average value is expected to rise 1.8 per cent to $377,700, the Ottawa-based industry group said.
“Prices remain stable, perhaps maddeningly so for the legions of bubble mongers,” said Douglas Porter, chief economist at BMO Capital Markets.
Porter noted the May data show “housing remains on track for a fabled soft landing … making a mockery of talk of an imminent collapse.”
While CREA still anticipates sales to fall 2.5 per cent in total during 2013 compared to 2012 – to 443,400 units from 454,573 – home buying should rebound to 464,300 units in 2014, a jump of 4.7 per cent.
Last July, Finance Minister Jim Flaherty announced stricter mortgage lending rules, the fourth such move in four years. The changes included a shorter amortization period for mortgages insured by government-owned Canada Mortgage and Housing Corp. in an effort to limit lending to those least able to afford it.
Flaherty went even further, subsequently warning banks not to pursue “race-to-the-bottom” rates for mortgages that could further pile on household debt beyond already record-high levels and reignite those concerns over a possible housing bubble.
Much of his expressed concern was focused on condominium building in Toronto and Vancouver, which it was feared might result in a glut and possible crash in those markets.
“History tells us that the impact from changes to mortgage insurance rules tend to be temporary, lasting up to three quarters,” said Diana Petra-mala, at TD Economics.
Petramala agrees Canada’s housing market appears to be headed for a soft landing, “with sales and prices growing at more sustainable levels than had been the case through 2010 and 2011.”
The spark that helped ignite the housing frenzy initially came from policy-makers at the Bank of Canada. Led by then-governor Mark Carney, the bank slashed its trendsetting lending rate to 25 basis points in 2009 to spur spending by households and businesses coming out of the recession.
While that rate was subsequently raised to one per cent in September 2010, it has not been adjusted since. Many economists do not expect that to change until at least late 2014.
“As long as interest rates stay low, affordability will remain relatively high. We have many times changed the mortgage rules, and we were attacking the wrong source of the problem,” said Charles St-Arnaud, an economist at Nomura Global Economics in New York.
“The reason why the housing market was so strong was, basically, interest rates were so low. The issue was not the availability of credit, it was the price at which it was given,” he said.
“If you were to give the same availability but, let’s say, 200 basis points higher, I don’t think we would be here in terms of the housing market.”
Carney has also been adamant – along with Flaherty – that consumers need to tighten their belts, warning household debt posed the biggest threat to the Canadian economy.
That mantle of concern has been passed to Stephen Poloz, who on June 3 replaced Carney – soon to be the new Bank of England governor.
Source: Gordon Isfeld, Financial Post
