Spotlight On Mortgages: July 19, 2013

Spotlight on Mortgages

Economy On Track To Recovery… Eventually

Canada’s economy and housing market may still be in a state of recovery but the gap is starting to close, according to the latest economic indicators. This week’s Bank of Canada Monetary Policy and rate announcement, coupled with new June data from the Canadian Real Estate Association, point to a healing market that, while still below precedented growth levels, appears to be normalizing.

Bank of Canada Announcement: Economy Still On Track

The BoC is keeping its Overnight Lending Rate at one per cent once again, a trend unbroken as of September 2010. The rate, which sets the standard for variable mortgage rates and the cost of borrowing, has been kept low by the Bank as a stimulus measure – cheap money encourages consumers to spend, pumping up the economy.

It’s not surprising that the rate will remain for the near future; some economists had speculated that new BoC Governor Stephen Poloz would take the opportunity to introduce change, but the latest edition of Monetary Policy shows that our economy just isn’t ready to put an end to these measures, and won’t be until next year. It’s a stance accurately anticipated by our July Mortgage Rate Outlook Panel, whose analysis was also released this week.

Global Markets Hitting Home

Global factors affecting the rate point to moderate improvement for the U.S. economy, and mixed reviews in emerging markets: Japan is seeing great success with their zero per cent rate policy, but China’s GDP growth remains weak, posing negative effects to commodities. This has led the BoC to downgrade their global forecast, though still anticipating recovery to strengthen in 2014 and 2015. On the homefront, Canadian economic growth, while lower than initially forecasted in April’s MPR, is on a positive track: it’s expected to grow 1.8 per cent this year, and to rev up to 2.7 per cent for the next two years.

 A Healing Housing Market and the Overall Economy

The MPR pointed to a few factors behind our moderate economic growth: spend-shy consumers, small wage increases, setbacks in specific sectors and imbalances in the housing market are all to blame for our economic engine’s slow start.

The latest CREA numbers for June housing echo those of the MPR: growth potential is looking good, but is still below pre-CMHC mortgage rule change conditions. Recent disasters, such as flooding in Southern Alberta and Toronto, are expected to skew starts and resale numbers for months to come – new listings are currently down by 0.5 per cent. For the month of June, however, sales have seen an improvement, up 3.3 per cent from May. While still 0.6 per cent lower than year-over-year, it’s an indicator that buyers affected by mortgage rules are rebounding back into the market.

Buyers Are Reacting To Higher Mortgage Rates

A recent hike in fixed mortgage rates, which are rising in tandem with the soaring bond yield market, may also be prompting some preapproved buyers to jump into the fray now… before rates go any higher!

Gregory Klump, CREA’s chief economist, says it’s certainly not the first time mortgage rate trends have booted buyers into action. “Increases in mortgage interest rates likely prompted some buyers with pre-approved mortgages to jump off the sidelines and into the market in June, particularly in larger, more expensive urban markets where affordability is strained,” he said in a statement. “We have seen this happen before. If fixed mortgage rates continue holding where they are or edge slightly higher, sales may ebb over the summer and early autumn, with slightly higher borrowing costs picking up where the finance minister left off last year to keep the housing market in check.”

Positive Sales Trends

June is the fourth consecutive month for sales improvement, which is 11 per cent higher than levels in February of this year. While sales have strengthened in two thirds of all markets, Western Canada and Montreal are experiencing the biggest booms. So far this year, 240,068 homes have been sold – still 6.9 per cent lower year over year, but an indicator that the gap is closing in markets like the Greater Toronto Area and Montreal. In Greater Vancouver, Calgary and Edmonton, they’ve actually surpassed last year’s levels.

Prices are also on an upward trajectory, hand in hand with this renewed demand. The national average home price increased year over year by 4.8 per cent in June, to $386,585.

Week In Review

This week saw very little change across the Best Mortgages table, with only one-year fixed mortgage rates increasing – by only one basis point! Five-year and 10-year fixed, and five-year variable rates are holding the status quo for now.

Related Topics

Mortgage News / Mortgage Rate Outlook Panel / Mortgages

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