Spotlight On Mortgages: April 19, 2013

Spotlight on Mortgages

New Forecasts For Economic and Housing Market Growth Are Lower Than Expected

The latest Rate Announcement was released by the Bank of Canada on Wednesday, stating that, once again, the Overnight Lending Rate would remain at one per cent. The announcement, Mark Carney’s second last in his position as BoC governor, hardly came as a surprise – economists have been stating that a rate hike prior to 2014 is highly unlikely as global economic unease prompts the bank to take a risk averse approach to our own economy.

Why One Per Cent Will Stick Around

In fact, the accompanying Monetary Policy Report points to slower than anticipated growth for Canada’s economy, and even the International Monetary Fund has come forward stating that it’s in our nation’s best interest to keep a lid on interest rates until this rocky economic climate smooths over. The IMF has forecasted that Canada’s growth will only be 1.5 per cent for 2013 – lower than the 1.8 per cent initially called for by the MPR’s January edition. Inflation won’t reach two per cent, the healthy indicator for growth, until 2015.

According to the IMF, Canada’s stance should be a cautious one that puts protection from global economic downturns before rampant internal growth. “The main challenge for Canada’s policy-makers is to support growth in the short term while reducing the vulnerabilities that may arise from external shocks and domestic imbalances,” the IMF stated in their Tuesday report.

Keeping the Overnight Lending Rate at one per cent has been the Bank’s go-to tactic for the past three years to ride out everything from effects of the U.S. housing crash to Europe’s bailout woes. The low rate’s purpose is to provide stimulus (cheap borrowing means businesses and consumers will pump dollars back into the economy), while not being so low that it hurts the overall economy, or devalues our currency. While it’s been a boon for mortgage and loan consumers, super low interest rates mean smaller earnings on savings deposits – sparking a recent rate increase battle among lenders earlier this week.

The Effects Of Canada’s Housing Market

The top economic depressor identified by IMF? You guessed it – our continuously slowing housing market. It predicts that cooling factors will continue nation-wide, and a new RBC Capital Markets report suggests mortgage loans will slow 2.4 per cent over the next two years – prompting a 1990’s-style market downturn.

As we previously reported, surveys have shown that would-be buyers appear to be waiting out high housing prices in anticipation they’ll soften along with nationwide sales. RBC’s report confirms that high levels of unemployment are also to blame for this widespread home-buying hesitation.

Condos Are Still Overheated

While markets appear to be balancing with fewer sales and mortgages across the nation, the Bank of Canada still feels the condo market, particularly in the GTA, is far too hot. While other types of housing starts have decreased over the past year, condo units are still being produced at breakneck speed, with inventory outweighing the demographic demand. States the BoC, “Despite the recent moderation in the rate of new housing construction, there are still signs of overbuilding, particularly of multiple-unit dwellings in some urban areas.”

As of February, the condo supply hit 21,202 units – up 34 per cent year over year, with another 61,000 in construction, and 35,757 expected to hit the market next year. The Bank is concerned that a pricing correction is inevitable – and that when it hits, the aftermath could affect all levels of the Canadian economy.

Week in Review

It’s been a busy week for the five year fixed mortgage rate, which has steadily edged lower by the day and now sits at 2.65 – only 15 basis points higher than the lowest variable five year option at 2.50 per cent!
The only other movement regards the 10-year fixed, which dipped nine basis points to 3.51 per cent from 3.6 per cent last week.

Related Topics

Mortgage News / Mortgages

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