This weeks top stories include how sales of resale homes south of the border had an unexpected decline in the month of December, how credit agencies Moody’s and Fitch downgraded most Canadian banks this week due to concerns about household debt and the Canadian housing market, how the Canadian government can’t tell what’s driving home prices because they are not collecting all the important data and how household debt increased again in the month of December after declining for the previous three months.
Contracts to purchase resale homes in the U.S. saw an unexpected decline in the month of December after three months of consecutive gains but the housing market recovery remains on pace. The National Association of Realtors (NAR) stated that their Pending Home Sales Index, which is based on contracts signed the previous month, was down 4.3% to reach 101.7 on the index marker.
Economists that were polled by Reuters had previously expected that signed contracts, which close on a sale a month or two after, rose 0.3% after a 1,7% increase in the month of November. The decline in contracts, blamed on lower inventory of available homes, points to the fact that resale properties could witness another decline in January after the decline witnessed in December. NAR chief economist Lawrence Yun commented, “The supply limitation appears to be the main factor holding back contract signings in the past month. Supplies of homes costing less than $100,000 are tight in much of the country, so first-time buyers have fewer options.”
The housing market is still expected to gain further traction this year and help support gross domestic product (GDP) growth in the U.S. Pending home sales increased 6.9% in the 12 months through December, which is a positive sign for the housing market. NAR now expects sales of resale homes to rise 9% this year after a similar gain for 2012. Resale home contracts declined in three of the country’s four regions in December. What do you think of the latest figures? Please comment below.
Moody’s Investors Service downgraded the ratings of numerous Canadian banks this week, citing the risk involved when it comes to consumer debt and the weak outlook for Canada’s housing market. Toronto Dominion (TD) Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale Desjardins and National Bank of Canada were all downgraded and have lost their triple A ranking in the worldwide banking system.
Both credit rating agencies stated that they are concerned over issues but that the country’s banks are still sound. Fitch Ratings was noted as saying, “Between 2001 and 2012, Canadian home prices appreciated by approximately 116 per cent and the household debt-to-disposable income ratio increased to 166.7 from 108.3. These increases are set against a backdrop of unemployment remaining above 7 per cent and GDP growth hovering in the 2 per cent to 3 per cent range.” Moody’s statement was eerily similar to Fitch’s statement.
The Canadian housing market is currently on it’s way to a downswing as sales continue to slow due to recent changes to mortgage lending guidelines by Finance Minister Jim Flaherty. The Bank of Canada (BoC) recently stated that credit growth has finally begun to slow but is still outpacing growth in incomes. The BoC is hoping that some of the weakness expected in the market will be recouped this year as the resource sector in Canada continues to show signs of strength. What do you think? Please comment below.
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Whether the housing bubble in Canada burst or comes to a soft landing, a crucial piece of information continues to elude many. Unlike Australia and the U.S., Canada does not keep any information on the number of foreign buyers in the country or where they came from. This would have been crucial to British Columbia when the market was at full swing and investors from China were being flown into the country strictly to purchase real estate.
The advantage to knowing how many foreign investors and where they are coming from is so that the government can have more insight on the overall health of the housing sector and what drives prices higher. This could also help with the tightening of mortgage regulations and whether or not new restrictions need to be implemented if speculation becomes too high. It’s impossible to have a debate on how to draft policy when no one really understands what’s driving the market.
Foreign investors make up anywhere from 3% to 60% of the market depending on where you look. On the other side of things, numerous Canadians are buying up properties in Florida. This is a place where we Canadians are considered foreign investors. This number is tracked in the U.S. and government will better understand how our money, being injected into the U.S. economy, will benefit them or be a burden. Do you think it’s time for Canada Mortgage and Housing Corporation (CMHC) to start ascertaining this data? Please comment below.
According to a report released this week by BMO Capital Markets, Canadian household debt rose in the month of December. This came on the heels of a statement released by the Bank of Canada (BoC) that stated there was no need to raise interest rates immediately because household debt growth was slowing.
In the month of November, household debt growth had slowed to a 3% in the three months leading up to the month. That was the slowest pace on record since 1999. BMO commented by saying, “Well don’t look now, but household credit popped in December and the three-month trend is now 4.8% but it’s still outgunning income growth and it’s hardly in free-fall.” The news should not cause any formal policy changes in the near future but household debt will be monitored and scrutinized over the next few months to see if action is required.
Doug Porter, deputy chief economist for BMO stated, “I just think it means the story hasn’t gone away. Household debt hasn’t simmered down to the extent the bank would like to see it just yet. I think it will. It just might take a little bit longer.” The BoC continues to keep the overnight lending rate a record low of 1% as it has been for more than the past two years. This lead to consumers over borrowing because money is cheap. This also helped consumers when it came to housing as low mortgage interest rates do their part to entice borrowers. What do you think of where the interest rate currently sits? Please comment below.
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