Return Of The Bubble?
Lately, the Canadian housing market has been painted as invincible – set after set of data indicate that both demand and prices continue to rise, offsetting the “cooling” effect put in place by last year’s mortgage rules, and sparking new fears that a bubble is forming.
These fiery buying conditions are further fueled by reassurances that the Canadian cost of borrowing will remain super low for the long term, as indicated in the last Bank of Canada announcement, which dropped any reference to when rates may rise again in the future.
This has already led to fears that Finance Minister Jim Flaherty will introduce new mortgage rules, like he did last summer. He has since gone on the record to say he’s sitting this round out – for now – but added he is meeting with industry developers for more insight, indicating that a day of reckoning might not be too far off.
A Global Issue
A too-hot-to-handle housing market and artificially low rates aren’t just Canada’s problem – central banks around the world have slashed their rates to record lows in order to prompt economic recovery. In the U.S., they’ve pushed back the so-called taper for at least one more month (and many believe into 2014). And just yesterday, the European Central Bank announced a rate cut from 0.5 per cent (half of Canada’s current rate), to a new low of 0.25 per cent.
ECB President Mario Draghi said in a statement that the cut reflects the pessimism over growth progress in the EU; inflation there was only 0.7 per cent in October – the lowest since January 2010. Like Canada, the benchmark for healthy inflation and economy is two per cent.
Cheap rate stimulus, while helping the economy, is a bit of a catch-22; consumers encouraged to buy contributes positively to the economy, but it helps drive up housing market prices too – until consumers are effectively priced out of the market.
Housing: The New Safe Haven
In the meantime, though, buyers worldwide just can’t get enough. As we previously discussed, home price indexes have increased by 10 per cent in some parts of the EU, as investors turn to real estate as a higher-returning, safer option.
This is a turn around from the usual demand for government bonds; traditionally, these are considered the safest form of investment, with U.S. treasuries leading the pack in security. However, the U.S. really played with fire when they allowed the debt ceiling to hover so closely, and it appears some damage has been done. According to Jamie McGeever’s recent article in the Financial Post, the first bond backed by profits made from foreclosed homes has been granted a triple-A credit rating – higher than those of U.S. government bonds. It’s no wonder investors are looking for more solid investments.
However the housing market follows the same golden rule as the stock market: buy low, and sell high. With buyers snapping up homes at such inflated prices in droves, could the stage be set for mass losses when prices inevitably outpace consumer capacity?
Subdued Economies Mean Lower Rates For Mortgages
As mentioned, low national interest rates are reflected by those offered by the bank, and that’s led our expert Mortgage Rate Outlook Panel to set the status quo for November. According to our team of experts, bond yields remain slightly lower as economic stimulus is expected to linger for the long term, prompting lenders to follow suit with moderate fixed mortgage rate discounting. Variable rates will see no change as the Bank of Canada drops the expectation of an increase in the short term.