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Five-year conventional mortgage has peaked
Sep 22, 2006

Despite all the rumblings about market corrections, especially in the United States and in some markets in Canada, the Winnipeg MLS® market continues to perform quite well. 

Even with the exceptional weather this summer — buyers and sellers may have been tempted to take a respite from real estate, think again — July was the best July on record and August was even better. 

In August, close to 50 per cent of all residential-detached properties sold at or above list price. Winnipeggers have a positive job outlook and are driving an MLS® market that is in its fourth consecutive year of double-digit price increases and robust sales activity. 

At the end of August 2002, the average residential-detached year-to-date house price was $104,577. For the same time period this year, it was $161,432, which is a 55 per cent increase over four years.

Helping fuel the local real estate market is the favourable bank rate. The Bank of Canada’s trend-setting rate remains at 4.5 per cent. And, interest rates are expected to remain on hold for the rest of the year, according to the Canadian Real Estate Association.

The rate was raised seven times by 0.25 per cent since September 2005 before being put on hold in July 2006. In a verbatim repetition of its statement made in July, the bank in September said that “the current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term.”

The bank revised its forecast for economic growth downward in July. The statement regarding its most recent decision to hold interest rates steady in September acknowledged that “the level of economic activity in the second quarter of 2006 was somewhat below the bank’s expectations, primarily because of weaker exports.” 

In assessment of current interest rate levels, it also said that “all things considered, the underlying trends in the Canadian economy appear to be in line with the broad thrust of the bank’s July projection in terms of output and inflation.”

In other words, interest rates are not too high, not too low, but just right. 

Looking ahead, the bank repeated its assessment of risks to the outlook for inflation that it published July. Namely, that “the upside risks to Canadian output and inflation relate primarily to the momentum in household spending and housing prices, while the main downside risk is that U.S. household demand could slow more rapidly than expected, thus reducing demand for Canadian exports.” In the Bank’s view, those risks have increased but remain “roughly balanced.”

“If the Canadian economy remains consistent with the Bank of Canada’s forecast, interest rates will remain on hold,” said CREA chief economist Gregory Klump. “Inflation is in sync with the bank’s expectations, but momentum for economic growth weakened at the end of the second quarter. Given that backdrop, interest rates should hold steady over the rest of the year.”

Bonds respond to expectations about inflation and economic growth, and mortgage rates track bond yields. 

“The economy is expected to shift into a lower gear due to weakening Canadian exports to the U.S,” said Klump. “This suggests the five-year conventional mortgage has also peaked.”

When the bank rate was hiked on September 6, the advertised five-year conventional mortgage rate stood at 6.85 per cent — down one-tenth of a percentage point compared to mid-August. 

Competition among mortgage lenders remains stiff, which continues to help many borrowers negotiate discounts of one per cent or more off advertised rates.

“An increase in new listings and recent home price increases are expected to prompt some home buyers to take more time to shop before buying and gradually cool sales activity in the second half of 2006 from the record levels we’ve seen in recent years, but not by much,” Klump added. 

Record level sales activity in the first seven months of 2006 is expected to help lift MLS® residential transactions to their sixth annual record in 2006, while additional price increases push the average price to its highest level on record, according to the Canadian Real Estate Association.