Defying expectation became a common theme this week, as a number of mortgage market factors took economists by surprise. On the home front, the Canadian Real Estate Association announced upward revisions to its 2013-2014 resale housing forecast, as market activity has been busier than expected.
Originally, CREA had forecasted a slower start to the year, taking into account buyers deferring their home purchases due the affordability restrictions put in place by OSFI last summer, predicting they would re-enter the market during a stronger 2014. Instead, we’re seeing the results of a rate hold phenomenon late in the year; buyers who locked into pre-approved rates up to 120 days ago (during a lower interest rate environment), are now rushing into the market before their deals expire.
Sales Just Won’t Slow
This is contributing to overall higher national sales numbers – expected to reach 449,900 units this year, according to the new forecast. That’s just one per cent lower than 2012 levels – hardly the crash so many have called for in the long term.
CREA’s new forecast indicates sales will increase further to 465,600 units in 2014, and that sustained demand will push home prices higher by 1.7 per cent to $182,800. Western Canada continues to be the top contributor to housing growth, with a recovering British Columbia market making up just under half of new sales. As well, B.C. and Alberta will be the only two Canadian provinces to actually exceed sales numbers for last year.
Canadian Mortgage Debt Continues to Grow
The sustained demand for housing is reflected in the growing Canadian debt-to-income ratio, which topped a new record at 163.4 per cent in Q2, according to Statistics Canada. This means Canadians are owing more compared to their income than ever before. The Q2 number, which jumped from 162.1 in Q1, is also the biggest ratio increase seen since the pre-mortgage rule days of early 2012.
Mortgage borrowing is the highest contributor to credit in Canada, which has now reached a total of $1.11 trillion.
Could Tapering Hesitation Lead to Lower Mortgage Rates?
Perhaps one of the largest surprises for markets this week was the U.S. Fed announcing they will not be reducing their Quantitative Easing efforts in the short term. Citing numerous sub-par U.S. economic factors as the cause, the Fed will hold off on “the taper”, as it’s been widely labelled and will leave their $85 billion-per-month bond buying program intact for the month of September.
The news caused global investors, who had expected a minimum scaleback of $10 billion, to binge on government bonds, driving five-year Canadian yields down by 15 basis points over a 24-hour period. As yields set the cost of fixed mortgage rates, a sustained lower yield trend could lead to a reversal of the steady climb witnessed over the past few months. However, lenders are slower to lower rates than they are to raise them; this investor optimism will need to remain for the longer term before we’ll see movement. In the meantime, focus has shifted to the Fed’s October 29 – 30 announcement, and whether a tapering will hit before the holidays.
Week In Review
Any changes prompted by investors reacting to the Fed’s news have yet to take form; there has been no change across the board for either fixed or variable mortgage rates.