“Canada’s recent economic performance has benefited greatly from a booming housing market, which has driven house prices, residential investment and construction employment to elevated levels. We see little hope of it rising much further.”

Excerpts from ‘Canada’s house of cards?’, BNN.ca, 28 Oct 2011
“Homeowner’s continue to hear a chorus of admonishments from the Department of Finance, the Bank of Canada and OSFI that these low interest rates will not be around forever,” Bank of America Merrill Lynch economist Sheryl King said in a recent note to clients. “However, we think the stronger signal households are receiving is from policy rates, which have held steady at 1.0 percent for 13-months now.”
King says roughly two out of three mortgages underwritten this year have been for a variable rate term, compared to a typical 25 to 30 percent share. …
“Over the past decade or more, rolling a variable rate mortgage from month-to-month has consistently been less expensive than a fixed mortgage rate. In essence, a generation of homeowners has experienced nothing but declining rates and lower monthly interest payments,” she says.
“This expectation will be hard to change. … The U.S. homeowner was lured down a very similar path by the Federal Reserve at the turn of the century.” …
“Canada’s recent economic performance has benefited greatly from a booming housing market, which has driven house prices, residential investment and construction employment to elevated levels, from which we see little hope of it rising much further. There is the strong likelihood of a housing market correction at some point in the not-too-distant future, which we believe would involve an outright decline in housing investment.”

Agree on all counts. -ed.

5 responses to ““Canada’s recent economic performance has benefited greatly from a booming housing market, which has driven house prices, residential investment and construction employment to elevated levels. We see little hope of it rising much further.”

  1. As a recent homebuyer, I chose a variable rate mortgage for the obvious financial reason of a lower monthly payment. But I also only purchased what I knew I could afford at a normal interest rate of 8 percent. Every month I take the money I am saving and apply it to the principal of my mortgage. When rates start to rise I am confident I can lock in at less than 8 percent. I have planned a very large security net into this purchase to ensure that I won’t be caught with a payment that I can’t afford. Unfortunately most buyers don’t do this. More unfortunate still is that I and you and all other financially prudent people in this province/country are going to end up paying taxes to help the overextended.

  2. Another update on the family friends in previous spot the speculator piece. They are now taking possession mid-November due to change of owners’ plans. They are trying to sell existing property but will rent out if they can’t sell for “right price”.

    But what got me is their exuberance after the (almost) new purchase. They are so excited and happy to be moving to a higher-valued home. Their excitement was great to see, but I then realised right away what that meant: they would be spending money on other things for their new home: furniture, repainting, appliances, pictures, and on. This is the “wealth effect” we all hear about; it’s not just practicality that elicits spending, it’s euphoria brought on by a new and increased standard of living.

    Whether they can afford it, we’ll see, but they’re happy now, and — forgive me — I left it at that. Besides, subjects are removed. No turning back now!

    • I have seen so many friends go through this wealth effect …. people moving to the next level. People who until that point were living moderately … suddenly replacing everything and leading quite different lives. I wish them well but in contrast, it reaffirms my beliefs to live true to my means.

  3. 2/3 of underwritten mortgages? Wow, that’s huge. Especially in Canada where that number includes those whose 5 year (3 year, 7 year, whatever) got renewed this year as well as new mortgages. When it comes (and I don’t think it will be soon, but it will be eventually) the interest rate pain will be swift and brutal. This keeps up one will be able to directly compute the hit to nationwide disposable income for ever basis point

    • Basement Suite PhD

      Agreed it will not be soon. I don’t see rates going up substantially for a very long time. I wish they would, but I just don’t see it happening.

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