Toronto Financial District
by David J
ScotiaBank released a new Global Real Estate Trends report that was quite optimistic when you compare it with other Canada housing prophecies. Whom we should believe? What is the future of Canada’s housing?
According to the report:
- The overall housing stock in Canada is not notably oversupplied. In fact, their figures show that housing inventory is a bit below its historical trend. There is little evidence of widespread overbuilding or speculative buying activity.
- Sales and prices will be relatively flat. “Even with interest rates forecast to remain low well into next year, public sector restraint and a lack of pent-up demand will temper both first-time and move-up buyer activity,” Scotiabank economist Adrienne Warren explained.
- The housing market will cool, not collapse. Housing starts will slow to around 185,000 units over the year. The Bank believes that risk of dramatic price correction is low.
These are great predictions for Canada’s housing, but unfortunately one favourable report isn’t enough to feel safe and confident about the future. Canadians have reached high levels of personal debt and even a small price correction can hurt some highly indebted households. 58 per cent of Canada’s households have some kind of debt, and most of them are heavily dependent on borrowing (they hold 73 per cent of all household debt in Canada). A survey by BMO says 20 per cent of Canadian households wouldn’t handle their living costs if the rates rose by two percentage points. One fifth of Canada’s households! “Truthfully, I think two per cent is pretty reasonable to expect,” said Laura Parson, BMO area manager of mortgage specialists for three Canada’s districts.
Future Interest Rates
New Home Checklist
by Alan Cleaver
Today, it is quite certain that interest rates won’t remain so low. They have already reached their bottom and have started rising. “If you had told me when we were lending money at 21 per cent, that we would one day be down to 2.99 per cent, I’d have been laughing,” said Parson. The 2.99 per cent rate is now just one ridiculous chapter in Canada’s history. By the end of March, BMO, followed by TD and others, rose their rates. “Short of the Canadian economy going into a recession and causing the Bank of Canada to cut rates back to their all-time low, there really isn’t an environment that would lead to significantly lower mortgage rates,” chief economist with TD, Craig Alexander, said.
Housing Market Regulation?
How will Canadians react? Scotiabank’s report probably didn’t count either with these events or with the greater regulation in the mortgage market that is now a new hot topic. Alexander recommended the government step in to the housing market and act to discourage speculators and already indebted households to take a new mortgage. He suggested four measures: the maximum amortization period for government-insured mortgages should be cut to 25 years, those who apply for a mortgage should be required to show they could still afford it if the rate rose to 5.5 per cent, banks should assess the ability of any borrower applying for a home-equity line of credit to pay it off within 20 years, and the minimum downpayment for a government-insured mortgage should grow to 7 per cent from the current 5 per cent.
The future is now hard to predict, and being optimistic isn’t the right way to face it. Canadians should be careful, consider their affordability before making big financial decisions, and remember that the best scenario is as possible as the worst one: recession.