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No U.S.-style housing collapse in Canada
Sep 17, 2010
The Canadian Real Estate Association (CREA) views on the recent Bank of Canada rate hike and on comments emanating from an Organization for Economic and Co-operative Development (OECD) report on Canada’s economy point to a more rational and responsible assessment of our current national real estate market that once again has certain media playing up housing bubble assertions in at least six markets in Canada. Canada Mortgage and Housing Corporation (CMHC) downplayed the Canadian Centre for Policy Alternatives (CCPA) report which cited Vancouver, Calgary, Edmonton, Toronto, Ottawa and Montreal as being cities that could be in for a major correction in prices.
In a story by Matthew Little of The Epoch Times, CMHC regional economist Ted Tsiakopoulos refuted CCPA’s report by indicating there has been a lack of speculative house purchases in Canada relative to the U.S. where the housing bubble has wreaked havoc on their housing market.
In his view, Canada’s market situation is a cyclical adjustment (already starting to occur) based on good fundamentals and a solid financial system, not a correction from over-valuations of house prices, which happened south of the border due to borrowing practices that were far looser in allowing unqualified buyers to buy a home.
There will always be changes in the ebb and flow of demand and supply in any real estate market. In Winnipeg, which is known for having one of the most stable and diverse economies in the country, fluctuations can occur, but more often than not the local market is much steadier and consistent in its performance than other more volatile markets across the country.
As reported in the recent WinnipegREALTORS® market release on August MLS® sales, due to some softening demand in the lower end of the market and increase in listings supply primarily in the move-up market, monthly average home prices have decreased from $250,000 this spring to the mid $230,000s level over the summer. The year-to-date average sale price is still up 11 per cent over the same period last year.
Other national economists do not see the dramatic market corrections CCPA is warning Canadians about. As Tsiakopoulos pointed out, mortgage rate increases will be gradual. Based on what the Bank of Canada is saying, two-thirds of Canadians in fixed-rate mortgages should not be overly concerned.
“The effect is, if rates go up, they are already prepared and won’t feel the impact as much,” according to the central bank.
Craig Alexander, chief economist at Toronto-Dominion Bank, told financial columnist Rob Carrick of the Globe and Mail: “The fact that rates are low and likely to rise at only a gradual pace in the next 18 months suggests you really aren’t going to get a major correction in the housing market. What you’re going to get is a period of softening, some declines in sales and a modest correction in housing prices. But after such a strong run, you could expect that.”
Alexander also noted that the build up in housing inventory in a number of markets this year, as well as some of the accelerated buying precipitated earlier this year due to the fear of rising interest rates, had a lot more to do with housing price adjustments than interest rates.
Interest rates are still very favourable for both variable and fixed mortgages. And, everyone knew the bank rate could go up as it was at rock bottom earlier this year.
Bank of Canada raises key rate 
The Bank of Canada raised its target for the overnight rate by one quarter of one percentage point to one per cent on September 8th, 2010. It was the third consecutive quarter point hike. The bank rate was raised to 1.25 per cent and the deposit rate is now 0.75 per cent.
The bank noted that, while the global economic recovery is proceeding, it remains uneven. The main downside risk cited in the bank’s announcement was the recent weakness in the U.S. recovery, saying, “In the United States, the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term.”
Owing largely to the weaker profile for U.S. activity, the bank now expects Canadian growth to be “slightly slower” than it had previously forecast in July. 
The bank downplayed the small revision to the outlook, however, saying, “Consumption growth is expected to remain solid and business investment to rise strongly. Both are being supported by accommodative credit conditions, which have eased in recent weeks mainly owing to sharp declines in global bond yields.”
While the outlook for the Canadian economic recovery has changed slightly, inflation in Canada has remained in line with the bank’s expectations. The bank noted that, while the monetary policy measures undertaken since April have had the effect of modestly tightening financial conditions in Canada, they nevertheless remain “exceptionally stimulative.”
As of September 8, the advertised five-year conventional mortgage rate stood at 5.39 per cent. This is down 0.1 per cent from a year earlier, and stands 0.4 per cent below where it was when the bank made its previous interest rate announcement on July 20, 2010. It is also 0.1 percentage points below where it stood at the beginning of the year.
The statement ended with the message, “Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.” 
The bank had previously characterized the uncertainty in the outlook as “considerable.”
Most analysts now expect the bank to hold off on any further rate hikes this year while it gauges the effects of recent tightening on the domestic economy, and watches the very uncertain situation south of the border. However, the overall tone of the bank’s statement was more hawkish than expected, and this has led some economists to suggest this may not be the last hike of the year. Much will depend on economic data out over the next month and a half in advance of the bank’s next decision on October 19.
The bank’s next Monetary Policy Report will be published on October 20. The bank will make its next scheduled rate announcement on October 19.
OECD report
The OECD recently published its September 2010 Economic Survey of Canada. The survey has generated interest from the news media.
CREA’s economists have reviewed the survey, and offer the following  comment on it:
1. The OECD survey recognizes that, “Rules to qualify for government-backed mortgage insurance have been tightened, and more measures should be taken if needed to cool down the market.”
However, the OECD’s survey also recognizes that, “the housing sector has now begun to show signs of cooling and is expected to continue doing so.” 
CREA had forecast that the Canadian housing market would cool, and recent statistics confirm that such is the case. 
Changes to mortgage regulations announced by Finance Minister Flaherty in February 2010 are sufficient to prevent the formation of a Canadian housing bubble. With the Canadian housing market now cooling and with further cooling expected, no further changes to mortgage regulations are needed.
2.   The OECD survey observes that, “High household indebtedness also implies a growing vulnerability to any future adverse shocks.”
However, the OECD survey also proposes that interest rates in Canada should rise only slowly and gradually. It also recognizes that economic growth will slow, and that inflation expectations remain well anchored within the bank’s inflation target range of between one and three per cent.
The consensus of Canadian economic analysts is that Canadian interest rates will continue to rise slowly.  CREA agrees that projected interest rate increases will cause discretionary consumer spending to decline, the savings rate to rise and reduce the number of resale housing transactions.
Projected interest rate increases will not be sufficient to cause home prices to crash. Homeowners with variable interest rate mortgages had to qualify for mortgage insurance at higher rates.  Small increases to interest rates will not result in homeowners’ inability to make their monthly mortgage payments.  Canada will not experience a U.S.-style massive glut of homes returned to the market, nor a U.S.-style home price correction.
3. The OECD survey recognizes that Canada’s monetary and mortgage regulatory authorities are well co-ordinated and have good processes in place for sharing information, which argues against “trying to fix what does not appear to be broken.”
CREA agrees.