Were Flaherty’s Changes Too Late?
The fourth round of changes to Canada’s mortgage rules were designed to clamp down on an overheated housing market. Now, a week later, analysts are wondering if Finance Minister Jim Flaherty jumped the gun. Detractors are pointing to a real estate market that was already beginning to decline, both in terms of sales and price. Tightening mortgage rules during a period of corrective market action could grind the market to the halt.
While the Toronto market remains hot, overall the Canadian housing market has cooled. The Canadian Real Estate Association recently released that its benchmark index for home prices was up to 5.2 percent in May from a year earlier. Most notably, gains in the Vancouver market were shrinking. Not surprisingly, Toronto’s rate was up about 7.9 percent from a year ago.
Even so, home hunters in Toronto are starting to see growing evidence that the condominium market is on the way back down to earth. Even though construction crews continue to dig up the downtown, the Building Industry and Land Development Association says year to date (through April), high-rise transaction are down by more than 20 percent from a year ago.
An Ineffective Solution?
While Flaherty’s focus on the Toronto market wasn’t unexpected last week, it’s unclear if the outcome will really have much of an impact. According to the Financial Post, few if any owners in Toronto can make money from renting out their units based on current prices. If these property owners were able to weather the storm up until this point, last week’s changes probably wouldn’t cause them much pause.
Other Factors To Watch
Despite Flaherty’s measures, there are bigger problems on the real estate horizon. The most troublesome is a defeated bond market where yields continue to drop – a sure sign that mortgage rate cuts could be on their way very soon. In fact, best rate mortgages are already coming down behind the scenes. Some of Canada’s biggest banks are offering preferred customers rates as low as 2.99 percent – the same rate that the Bank of Montreal offered earlier this year, spawning a cut-throat rate war between competitors. If you’re considering buying this summer, don’t wait – available rates are significantly better than those that are being advertised. Securing a pre-approval today could save you thousands of dollars over the life of your mortgage.
Could Rates Go Up?
Since monetary policy is so closely tied to world events, a strong dollar, and an almost-nonexistent inflation rate, raising rates now could result in disaster. Until the global economy turns around, there’s very little chance of an increase in rates.
Unfortunately, the Canadian consumers’ reliance on low interest rates to manage high debt loads will remain a risk for the rest of 2012. And the outlook is grim. According to a report by Moody’s Investors Service, a 325 basis point rise in interest rates by mid-2015 would push the proportion of households with total debt service ratios of 40 percent or higher to nearly 20 percent of the population. According to the Bank of Canada’s Financial System Review Published in June, only 11.5 percent of Canadian households fell into this category in 2011.
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