Cure for hot housing market carries risk

Cure for hot housing market carries risk

December 29, 2009

Flaherty’s warning that he may act to cool overheated sector could backfire, economists say


canadian housing market


The housing market that led Canada out of recession is now so hot that Ottawa is talking about doing something to cool it off, a move economists say carries risks for the economy.


Fuelled by record low interest rates, residential real estate prices have gained 20 per cent this year. And Finance Minister Jim Flaherty is now warning he will step in if prices get too high by tightening the rules for borrowers, by increasing the minimum down payment and shortening the maximum length of mortgages.


Such a move would have to be done cautiously, economists say, because the real estate market touches all parts of the economy, and anything that caps its growth could also temper the recovery.


Policy makers are concerned homeowners will take on more debt than they’ll be able to afford when interest rates rise again, possibly leading to a painful correction later.


The Bank of Canada has vowed to keep lending rates low into the middle of next year, limiting its options for taking the pressure off a hot market.


But since the federal government dictates rules around down payments and amortization periods, it can effectively dampen the housing market without increasing borrowing costs for businesses.


Mr. Flaherty said in an interview with CTV the government would consider raising the minimum down payment from 5 per cent “to a higher figure” and reducing the amortization period of 35 years to “something less.”


But the minister stressed that the government has not yet made that decision.


“If there is, in the future, evidence of a residential real estate bubble, the tools we have are the tools we’ve used before, relating to insured mortgages, lending standards, amortization periods and down payments, which is what we acted on in the summer of 2008,” Mr. Flaherty said in an interview with The Globe and Mail. In the summer, the government said it would no longer insure zero-down-payment mortgages or mortgages with an amortization period of more than 35 years.


Tougher requirements could price out first-time buyers such as 28-year old Michael Maynard, who are vital to a healthy market as they buy entry-level homes and allow others to trade up to larger and more expensive properties.


The Oshawa, Ont., law clerk has been looking for a house with his wife Angela for most of this year. They intend to make a 5-per-cent down payment, which they managed to save while Angela was on a maternity leave.


“If the requirement went up, I’d be out of the market right now,” he said. “There’s no way. We’d cool our heels. We’d come back eventually, but there’s no way we’d be able to stay in the market. And we want to take advantage of low interest rates, so that would be a shame.”


Buyers like the Maynards, who rely on low down payments and extended repayment periods to afford their homes, are becoming more common. In a November report, the Canadian Association of Accredited Mortgage Professionals found 18 per cent of mortgages were amortized over more than 25 years – a gain of 100 per cent in two years.


Sonia Baxendale, the head of Canadian Imperial Bank of Commerce’s Canadian lending operations, said Mr. Flaherty’s interest in this issue is both “pro-active and prudent.”


“This is not about there being an issue today, it’s about thinking through a potential issue down the road,” she said. “This is consistent with the long-term view we are taking on behalf of our clients so we support the minister in reviewing this now to ensure consumers are not taking on more debt than they can handle in a more normalized rate environment.”


This is the rare instance where government has an obvious tool it can use to deal with a potential bubble in a specific market, Toronto-Dominion Bank chief economist Don Drummond said.


“When you have a targeted regulatory instrument, you use that instead of the dull instrument of raising interest rates,” he said.


“Housing is the only market where you do have a tool with almost surgical precision.”


Any change to mortgage regulations is potentially dangerous, warned CIBC World Markets economist Benjamin Tal, because the government could “overshoot” its goal. While Mr. Tal agrees the market is showing signs of overheating, he said prices should “stagnate” in the coming months as pent-up demand is satisfied and new housing starts alleviate a shortage of listings for older homes.


“My message to the government is to be careful not to overshoot,” he said. “You do not kill a fly with a hammer. Housing is a very important part of the economic recovery, which is still very fragile. You do not want to ruin that market.”



One mortgage, three scenarios

The mortgage: Five-year fixed rate mortgage at 4.19 per cent, monthly payments, for $300,000.

1. 35 year am: Monthly payment is $1,356.16

2. 30 year am: $1,458.99

3. 25 year am: $1,609.12




Source: Royal Bank of Canada website


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Canada’s rate hikes will be tied to the Fed

Canada’s rate hikes will be tied to the Fed

December 29, 2009 – Updated: December 29, 2009

When the Canadian dollar topped 95 cents (U.S.) last week, approaching a three-week high toward the end of a year that has seen the currency gain 16 per cent against the U.S. dollar, it deftly illustrated the biggest influence on what will be Mark Carney’s most crucial decision of 2010.



As economists and investors debate with increasing vigour about when the Bank of Canada will raise interest rates from their current rock-bottom level, the effect such a move could have on the loonie may mean borrowing costs have to stay where they are well into the recovery. The central bank chief pledged last April to keep his main interest rate at the record-low level of 0.25 per cent until at least June, 2010, in order to stimulate enough borrowing and spending to solidify the economy’s recovery. The resulting ultra-cheap mortgages spurred a buying spree in housing, and by the fall, Mr. Carney was stick-handling around endless talk – from just about anywhere other than the central bank – of a potential asset bubble in residential real estate.


While saying the white-hot market was a result of pent-up demand from Canadians who had put off purchases during the worst days of the recession, Mr. Carney finished the year warning people to avoid taking on more debt than they would be able to handle when interest rates go up again, as they inevitably will.


Finance Minister Jim Flaherty, albeit indirectly, poured some cold water on the notion that Mr. Carney would raise borrowing costs before mid-2010 to cool the housing market; in interviews last week, Mr. Flaherty noted he is prepared to take steps of his own if necessary, such as increasing the minimum down payment on a home and shortening the maximum length of mortgages.


But even as the central bank characterized its concerns about Canadians’ debt loads as a low risk to spread through the financial system, Mr. Carney emphasized throughout December that his commitment to wait until next June before tightening monetary policy was very much conditional on the outlook for the bank’s 2-per-cent inflation target.


“I’m not worried that we’re in a box, because if things change we would change policy as appropriate,” Mr. Carney told BNN in a year-end television interview that aired Dec. 17. “We have the flexibility to adjust it, either by shortening or lengthening [the waiting period], if that’s what’s necessary to achieve our mandate.” And that’s where the loonie comes in.


To keep the housing sector in check, Mr. Carney can do little more than manage expectations for a rate hike that will come eventually, at a time of his choosing. That’s in part because inflation is still below the bank’s target.


It’s also because with borrowing costs so low in most of the world’s major economies, raising interest rates would make Canada a more attractive place for international investors seeking higher yields, which could send the Canadian dollar soaring. That would further complicate life for exporters trying to regain a footing in global markets that are still smarting from the downturn.


“Given the remarkable homogeneity of monetary policy around the world, you really do risk being that tall poppy and getting hit quite hard by the currency,” said Eric Lascelles, a strategist at TD Securities in Toronto. Mr. Lascelles pointed to the recent example of Australia, another commodity-based economy, where the currency soared against the U.S. dollar after that country’s central bank became the first in the Group of 20 nations to raise interest rates in early October.


Last Thursday, the Canadian dollar appreciated 0.8 per cent in part because investors had started to become more convinced the central bank was merely considering a rate hike before mid-2010 or, at the very least, before the U.S. Federal Reserve, which many investors see keeping rates near zero into 2011. That has helped the loonie outperform its major counterparts this month.


The Bank of Canada, which will update its forecasts during the week of Jan. 18, currently maintains it could even take until the third quarter of 2011 for inflation to return to 2 per cent and for the economy to be running at full tilt, largely because of the currency’s drag on sales of Canadian goods abroad.


Some analysts are painting Mr. Carney’s assessment as too cautious.


“Both growth and inflation risks lie north of the Bank of Canada’s current forecasts,” Yilin Nie and David Cho, strategists at Morgan Stanley in New York, wrote in a recent research report. “We believe the bank will need to hike before its conditional commitment to keep rates low until June, 2010, and before the Fed. Our forecasts show the first Bank of Canada rate hike in April, 2010.”


Most Canadian economists, meanwhile, remain in wait-and-see mode.


Michael Gregory of BMO Nesbitt Burns in Toronto wrote in a Dec. 18 note to investors that he sees “increasing risk that the policy rate renormalization process will kick off soon after Canada Day, with a small but not small-enough-to-ignore possibility that the first action could occur even earlier.”


At the opposite extreme, however, are those who believe Mr. Carney will wait until late next year, or even later, to tighten – not least because the effect on the currency could be too severe should the Bank of Canada’s benchmark rate be lower than the Fed’s for more than a few months.


“The Bank of Canada will think very, very hard before raising interest rates ahead of the Fed,” said Benjamin Tal, a senior economist at CIBC World Markets in Toronto, who predicts a slow U.S. recovery will keep the Fed on hold and force Mr. Carney to wait until the first quarter of 2011, when the rate will jump to 1 per cent. “To an extent, not fully but to an extent, monetary policy in Canada is being highly influenced by developments in Washington.”


Mr. Lascelles of TD Securities said the Fed won’t abandon its unprecedented stimulus until early 2011, with the Bank of Canada therefore waiting until the fourth quarter of 2010, even though Canada’s economy is poised to heal more quickly than that of the United States. The bank can and probably should hike rates before the Fed because of stronger fundamentals, but it really is quite restricted in terms of how much sooner it can go.


While the image of the central bank being held captive to the Fed might bring shudders to Canadian nationalists, Martin Coiteux, an economist and professor of international business at HEC Montreal who has tracked monetary policy in both countries, said the notion is overblown.


First, the effect on the currency of the difference between Canadian and U.S. borrowing costs are, historically, just a few months, he said. And even as Mr. Carney worries about hurting exporters any more than they’ve already been hurt, if the domestic spending he has stoked in the housing sector catches on enough to raise prices throughout the economy, he’ll have no choice but to raise rates, regardless of the Fed.


“[The Bank of Canada’s] main objective is to keep inflation between 1 and 3 per cent per year, with the target being at 2 per cent,” Mr. Coiteux said. “We might be going up very gradually toward 2 per cent, but as we move there, in order to keep their credibility, they’ll have to move, too.”





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Parksville Qualicum News – Is the Canadian housing market in a bubble?

Is the Canadian housing market in a bubble?

Published: December 24, 2009 7:00 PM

“It sure looks that way,” according to well-known North American economist David Rosenberg.

In his Special Report — Is the Canadian housing Market in a Bubble, Mr. Rosenberg adds his voice to a growing list of those from Canada’s financial establishment who are concerned about Canada’s growing household debt.

In fact, even the Bank of Canada is concerned, warning Canadians last week that growing household debt now represents the biggest risk to Canada’s financial system, and pleading with borrowers and lenders to remember that the current era of super-low interest rates won’t last.

With interest rates as low as they are, and with insured mortgages available with as little as five per cent down, and 35-year amortizations to boot, is it any wonder that Canadians are taking advantage of this window of affordability.

The problem is: affordability will disappear when rates go up.

And since rates have nowhere to go but up, it is not a question of if, but when.

Where will this lead?

Unlike the U.S., a banking crisis with associated bailouts in Canada seems unlikely.


The answer may surprise you: Canada’s banks have already been bailed out — through the Insured Mortgage Purchase Program — our government’s response to the credit crunch. For the most part, Canada’s banks have been able to get these high loan-to-value ratio loans off their books, with the help of CMHC (Canada’s version of Fannie and Freddie).

In other words, if this were to morph into a U.S.-style foreclosure crisis, it is not the banks that would suffer the most.

It would be the taxpayer, as the majority of the high-risk debt is insured by our government.

I should note that in his report Mr. Rosenberg is not forecasting a crisis, but does acknowledge that this is something near the top of his concern list, and that such an event he would “not exactly label as being non-trivial.”

To me, this is the proverbial elephant in the room, and needs to be considered when making investment decisions.

As we have seen clearly over the last year, financial markets (i.e. the stock and bond markets, currencies, interest rates, commodity markets, and real estate markets) are closely connected, and all affect one another.

Investors need to understand risks in order to mitigate them, and to identify investment opportunities.

Remember. There is always a bull market somewhere!

It may not surprise you to learn that best-selling author and financial forecaster Garth Turner has strong opinions on this topic.

Stay tuned for more on this as Garth will be in our area in the new-year to present his views on Canada’s real estate market, and on financial markets in general.

Hello world!

Dear Friends,

Real estate is said to be one of the best investments that an individual can make, but if this is true, why do so many people fail at it? The truth is that an adequate real estate education is needed in order to help you out along the way because the real estate industry can truly turn on you in a real hurry if you are not prepared. Real estate investments are very likely to yield a generous return if the proper steps are taken, but too many people simply do not have the skills to make these deals happen. These are the people who did not take the time to get a real estate investing education and, therefore, will be more likely to fail when things do not go according to plan.

This blog has been created with a sole purpose of providing you with the latest and most relevant information on topics related to real estate such as understanding mortgages, financing alternatives, news and updates, tips for first time home buyers, and much more.

Do you have a question(s) about the real estate market? Is there a topic you would like to hear more about? I would love to hear from you!

Thanks and best wishes!

Tariq Sultan

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Globe and Mail: Housing drives October’s GDP growth

December 23, 2009

Housing drives October’s GDP growth

By Jeremy Torobin
Globe and Mail Update

Gross domestic product grows by a modest 0.2 per cent in October

Canada’s economy posted a second straight month of growth in October, as spinoff effects from the hot housing sector help solidify the country’s rebound from recession.

Thanks to rock-bottom interest rates, sales of existing homes are surging. The buying spree is helping fuel broader domestic spending needed to power the economy until foreign demand picks up.

While the October gross domestic product increase of 0.2 per cent was less than the 0.3 per cent economists anticipated and half of the 0.4-per-cent expansion registered in September, it capped the first back-to-back monthly gain since late 2007.

And economists said the effects of monetary and fiscal stimulus – cheap mortgages and tens of billions in stimulus programs that have helped companies start hiring again – provide reason for optimism.

“The performance in October may not tell that story, but we do think that there’s significant momentum in the Canadian economy,” Millan Mulraine, an economics strategist with TD Securities in Toronto, said in an interview.

“When someone buys a house, they go out and buy furniture for it. The real-estate sector drives consumer spending, due to the other things that people buy after they purchase a home.”

Consumer spending and auto sales were behind October’s GDP gain. The retail industry’s 0.3-per-cent gain in the month provides further evidence of the rebound in consumer spending that Bank of Canada Governor Mark Carney says he’s counting on amid tepid sales for Canadian exports. Mr. Carney said last week that he expects the emergence from recession to be “more protracted and more reliant” on domestic demand than usual.

The October GDP numbers also got a boost from cold weather that spurred higher demand for electricity and natural gas in some parts of the country, leading to a 2.4-per-cent increase in utilities.

October kicked off a quarter for which most economists predict growth of about 3.3 per cent on an annualized basis – which would be the fastest in more than two years – after an anemic 0.4 per cent between July and September and three straight quarters of contraction before that.

On a year-over-year basis, gross domestic product was down 3.2 per cent in October, indicating the ground the economy still needs to gain to get back to pre-recession levels.

Indeed, not all economist see clear sailing ahead. Douglas Porter, deputy chief economist at BMO Nesbitt Burns in Toronto, said the smaller-than-expected monthly gain indicates it may be tough for the economy to post growth above 3 per cent in the fourth quarter. He cautioned that sectors such as manufacturing and resources, neither of which fared well in October, carry “huge weight” in terms of economic growth.

Canada’s battered manufacturing industry was largely unchanged in October after a 1-per-cent gain the month before, Statistics Canada said. Meanwhile, industries that declined in October included finance and insurance – even as residential mortgage loans rose – and the mining and energy exploration sector.

Crucial to a sustained Canadian recovery is a rebound in U.S. consumer spending. Reports yesterday showed American consumers’ spending and incomes climbed last month, as the U.S. labour market showed signs of reaching a bottom. At the same time, the 0.5-per-cent gain in spending was less than forecast and sales of new homes unexpectedly dropped 11 per cent, reminders that recovery south of the border will take time.

“The U.S. consumer remains bogged down and isn’t going to come riding to the rescue for the global economy as it has in most other recoveries,” Mr. Porter said, meaning Canada’s rebound will be “half-speed.”

Nonetheless, gains in Canadian home prices are boosting sentiment among consumers across the country, and Mr. Porter acknowledged the housing boom could mean more spending on furniture, appliances and renovation projects over the next few months.

That helps explain why some economists are urging a measured approach to cooling the housing market if it starts to look as if a bubble might take shape. Both Mr. Carney and Finance Minister Jim Flaherty have expressed concern that ultra-low mortgage rates are enticing some Canadians to take on debt they won’t be able to handle when interest rates start rising again.

Mr. Carney has dropped several hints this month that should the outlook for total inflation in the economy change, he reserves the right to raise rates sooner than mid-2010.

Mr. Flaherty said this week that he’ll step in if home prices get too high by tightening the rules for borrowers, increasing the minimum down payment and shortening the maximum length of mortgages.