Finance Minister Jim Flaherty stated last week that he realizes tightening mortgage rules could slow economic growth by force-cooling the housing market, and also that he was prepared to take this risk. Since then, TD Bank Mortgage professionals have estimated that Ottawa’s move to reduce the maximum amortization period to 25 years could curtail growth by as much as 0.2 percentage points in 2013.
TD’s economists believe that Canada’s economy will under-perform even moderate expectations in the next two years, citing the recent tightening of mortgage and credit rules as a major contributing factor. TD Bank now expects growth in Canada this year to average 2.1 percent, a tenth of a point down from March’s outlook. A 2 percent growth is expected for 2013, down four-tenths of a point from previous forecasts.
While that’s still enough to stimulate a slight increase in the unemployment rate (TD anticipates an increase of 0.2 percent from 7.3 to 7.1 percent), it’s still a dismal outlook. What’s more, TD’s outlook appears to be more positive than others, especially those of Capital Economics. The Bank of Canada is expected to announce their projects at its next policy announcement in mid-July.
Understanding the Estimates
Slower global growth and falling commodity prices are partially responsible for TD’s reduction of the nation’s growth rate. The other portion is attributed to decreased consumer spending, particularly in the housing market. TD mortgage specialists anticipate changes to the mortgage rules and new borrowing restrictions will have a significant impact on domestic traction. What’s more, spending on durable goods will likely fall by more than one percentage point from previous expectations.
So, where’s the silver lining?
According to Boris Bozic, CAAMP Chair and President/CEO of Merix Financial, there isn’t one. Bozic is calling out policymakers to explain how they plan to counter any unintended consequences from the new mortgage rulings. When Minister Flaherty erased significant borrowing options and elevated short-to-medium-term housing risk, he provided very few details about his decision-making process. Interest rates, not overborrowing, is the #1 creator of excess housing demand. So why eliminate financial choices that have obvious benefits when used responsibly?
In order to better understand Ottawa’s changes, Bozic and other mortgage professionals are asking policymakers to release their research on topics like:
- The logic behind imposing national rules for a localized problem (specifically the hot condo market in Toronto).
- The analysis of tighter home buying rules on rental costs.
- The lost economic output that could result from reducing real estate investment and consumer spending.
- An in-depth review of the compounding effect these regulations could have if (and more likely when) unemployment spikes and interest rates begin to rise.
Another Slump on the Way?
While experts won’t actually put a number on the odds of another economic slump in Canada, it’s definitely a thought on the minds of many. The European situation remains the #1 risk, by far. What’s more, the U.S. and Chinese markets are both consistently under performing expectations.
If there’s one bright spot in the Canada economy, it’s business investment. This remains steady, although things could slow down thanks to risky global situations.
Interest rates remain low as of today. If you’re thinking about purchasing a home this summer, don’t wait. Secure your best rate mortgage now with help from a knowledgable mortgage broker at FamilyLending.ca.