This weeks top stories include how the International Monetary Fund feels that Canadian home prices are still overvalued and that further intervention may be required, how fears of a housing crash or market correction have declined and how the spring market may hold many surprises this year.
According to the International Monetary Fund (IMF) home prices in Canada are still overvalued by roughly 10%. The IMF warned last week, for the fifth time, that intervention is required in the mortgage sector if personal debt levels continue to rise. The IMF also noted that Canadian currency is currently between 5% and 15% higher than it should be according to long term economic fundamentals.
The IMF did make note that the government intervened in 2008, and numerous times after that, to change mortgage lending regulations to help cool the market and over borrowing. This may have caused home prices to flat line and possibly even prevent a housing market crash like the one witnessed in the U.S. Residential construction and prices are still deemed to be above the average norm. Roberto Cardarelli, IMF mission chief for Canada was noted as saying, “Our analysis suggests an overvaluation in real terms of about 10% at a national level, although with significant variations across provinces.”
Home prices are now growing at the slowest pace in over three years with year over year housing starts falling in the month of January. The concern still lies on external shock factors that could cause Canada to lose jobs and Canadians to file for more bankruptcies. The Bank of Canada (BoC)is also staged to make more changes if household to debt to income ratio’s continue to rise past their current record highs. The changes could be in the form of larger down payment requirements, lower caps on debt servicing ratio’s or even tighter loan to value restrictions on finances or purchases.
The BoC needs to veer away from interest rate hikes to stop over borrowing because it could cause many consumers to be under water overnight. The move to raise interest rates should be considered as a last resort at this time. If the BoC continues to tighten mortgage lending guidelines, this could have the same affect as raising interest rates without causing massive defaults on other loans. The end goal is to stop people that aren’t qualified from getting into the housing market, which is achievable using the previous strategy. The BoC continues to watch our gross domestic product (GDP) for a marker of what the economy will do next. We should also be using the same marker to see what the BoC will do next. What do you think? Please comment below.
January witnessed more sales of existing homes with sales increasing 1.3% from the previous month in December. The Canadian Real Estate Association (CREA) stated that sales compared to the previous year, not seasonally adjusted, had declined by 5.2%. CREA’s Home Price Index was up 3.1% from the previous year as well. This was the smallest gain on record since April of 2011.
Year over year sales have been on the decline since 2012 when the government further tightened mortgage lending guidelines in the month of July. The concern was that the housing market needed to cool as low mortgage interest rates did their part to fuel a housing bubble. Economists and analysts alike are on the fence of whether or not the Canadian housing market will have an all out crash or if there will be a soft landing with prices and sales gradually declining. Home prices rose at the slowest level on record in the past three years.
Bank of Canada (BoC) Governor Mark Carney chimed in with the following comments, “We’ve seen adjustment in the housing market, we think there’s a bit more to come in the next few years. Again, I think Canadians have listened to the message and they are adjusting.” Gregory Klump, CREA’s chief economist also commented, “Until then, the focus may remain on how sales were stronger in the first half of last year compared to lower, but stable, national activity since then.” What do you think? Will there still be a market correction or is Canada’s housing market on solid ground? Please comment below.
Two years ago, economist David Madani caused panic in the Canadian real estate industry when he predicted that Toronto’s booming housing market was set for a 25% market correction. Today, he is still watching closely as the GTA housing market heads into one of the most pivotal spring markets in over 20 years.
Madani is still convinced that the current housing boom, fueled by low mortgage interest rates, is going to have a hard landing with Toronto’s condo sector taking the brunt of the correction. He’s noting that the condo sector is overbuilt and overpriced. Mr. Madani weighed in stating, “What’s critical is what happens in the spring. If we continue to see increases in active listings as sales continue to decline, then we’ll start to see more obvious signs of prices dropping.” March to May is the period that usually predicts how the remaining of the year will be but with both high rise condo’s and low rise homes on different spectrum’s of the real estate bubble, it will be interesting to see if the market can still be predicted during the same time period.
Toronto and Vancouver both had six months of declining sales up until January of this year. GTA sales may continue to gain steam as home prices increased, against all predictions, by 3% for housing and no gains for condo’s. The jobless rate is still a major factor with the rate at its lowest level in four years. Interest rates are the last piece of the puzzle and the Bank of Canada (BoC) continues to state that they will not raise the overnight lending rate until at least April 2014 but my intuition says that we will see some sort of increase before the end of this year. Where do you think the housing market is headed this year? Please comment below.
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