But few would deny that Canada’s house prices are strained to the brink — even the optimistic bank economists concede there is simply no room for prices to grow much in the coming years. Many of them continue to say there is a risk of falling house prices.
Many of them point out that, despite the astronomical prices, housing affordability in Canada is still not much above long-term norms. But that’s entirely because of four years of rock-bottom interest rates that have shrunk monthly mortgage payments relative to house prices.
Now those rates are beginning to inch up, at least on popular fixed-rate mortgages. And a new study from Will Dunning, the chief economist for Canada’s mortgage broker lobby, shows just how much of an impact rising rates could have on the housing market.
Dunning, who carried out the study for his private research firm, looked at the Toronto housing market. He found that a relatively small one percentage point increase in mortgage rates would result in a decline in home sales in the metro area of 15.3 per cent by 2015. Prices would drop about six per cent during that period, to an average of around $470,000, compared to $504,000 today.
Even a half-percentage point rate hike would mean an 8.8-per-cent decline in sales and a 2.6-per-cent decrease in prices, Dunning predicted.
Put simply, Canada’s housing market would have a hard time handling even a small interest rate hike.
Which is alarming, because, as previously mentioned, rate hikes are happening. Government of Canada bond yields, which are linked to fixed-rate mortgage rates, have spiked sharply in the past few months, forcing banks to raise mortgage rates.
The days of sub-three-per-cent fixed mortgages at your local bank appear to be over, with the lowest mortgage rate up 0.65 percentage points in recent weeks, the Globe and Mail reports, to above three per cent.
This is happening because the U.S. economy is improving. Home prices south of the border have spiked by double digits over the past year (another housing bubble, anyone?) and the jobless rate has been creeping downward.
That prompted Federal Reserve Chairman Ben Bernanke to suggest the Fed would start withdrawing its massive stimulus program before the end of the year. The suggestion tanked the markets a few weeks ago, but also sent bond yields soaring, with mortgage rate hikes just behind.
So in other words, a return to normal economic conditions, complete with a return to normal interest rate levels, could pretty much sink the housing market. Uh oh.
But Dunning doesn’t think this is likely. Perhaps ironically, he expects Canada’s housing market to be held up by continuing global economic weakness.
“The fiscal reconstruction of Europe is going to be a drag on the world economy for years, which will result in sustained pressure on resource industries, negatively affecting countries like Canada and Australia that are heavily reliant on resources,” he wrote.
“In short, I am not convinced that the rise of interest rates is justified, and we could see some retreat during the coming months.”
So thank the heavens for the ongoing economic crisis — it might just save Canadian homeowners.
Original Article
Source: huffingtonpost.ca
Author: Daniel Tencer
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