Buyers Showing Caution, Bank Keeps Rates Low

EditorGeneral Interest, Home Insurance, Housing Costs, Mortgage Down Payment, Mortgage News, Mortgage Term, Mortgage Types, Residential Mortgages

The Bank of Canada held its ground today, leaving the overnight lending rate unchanged at 1 percent. While the move was expected (the rate has been locked at this near-historic rate since September of 2010), the tone of the announcement was far less confident than previous press conferences.

The Bank’s release explained how a global economic slowdown is impacting Canada’s growth potential. While domestic factors remain strong, the Bank has trimmed back its outlook, suggeting that the economy will grow “at a pace roughly in line with its production potential in the near term.” Consumption and business investment are expected to be the main source of growth. However, the effect of lower commodity prices on Canadian incomes, combined with increasing household-debt, could cause some serious setbacks.

The Bank’s latest projects have the economy growing by roughly 2.1 percent in 2012, 2.3 percent in 2013 and 2.5 percent in 2014. Experts anticipate that the economy will reach full capacity in the second half of 2013. Core inflation is forecast to remain at 2 percent over the projection horizon as the economy operates near its production potential. Lower gasoline and oil prices should help keep the CPI inflation noticeably below the 2 percent target in the coming year.

Weakening Global Growth Prospects

Developments in Europe point to a renewed contraction, while emerging market countries, including China, continue to see slower than anticipated growth. Even though economic expansion in the United States continues, things are slow. The decrease in global activity has led to a sizeable reduction in commodity prices and is expected to moderate global inflationary pressures. Periods of considerably volatility have marked the global financial markets since April, and while the Bank’s projects assume that the European crisis will continue to be contained over the coming months, there’s no guarantee things won’t get worse.

So What About the Housing Market?

Today marks the first interest rate announcement since Ottawa implemented new national mortgage regulations. While it’s still too early to tell just how big of an impact these rules are having on the market, signs are already pointing to a cold spell. June data reveals that existing home sales have dropped from 1.3 percent in June 2012 and are down 4.4 percent from this time last year.

The most telling sign that the market is cooling? Condo sales in Toronto’s downtown core took a big dip in June. The latest figures from the Toronto Real Estate Board suggest that downtown condo sales fell by 18 percent in June from this time last year. By comparison, sales rose 5 percent in May.

While a decline in sales and an appreciation in prices is music to Ottawa’s ears, it’s not necessarily a sign that things are getting better. These figures forget one key aspect – all of the new condo construction that’s currently underway. More units are currently being built in Toronto than in any other North American city. Which leads to the ultimate fear – insufficient demand.

What’s more, the new mortgage insurance rules imposed by the federal government last month are having a direct impact on pre-construction sales. If a buyer of a pre-construction unit doesn’t sign final best rate mortgage documents by the end of the year, they are bound to the new rules. In most cases, mortgages for pre-construction units aren’t typically finalized until the building is done, a process that can sometimes take two years.

Only time will tell how the Canadian real estate market will manage based on economic issues both at home an abroad. Stay tuned to the Mortgage Talk Blog over the coming weeks for more information.

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