This week was yet another reminder that the Canadian resale housing market is driving the economic recovery in Canada. In particular, residential investment has been one above average growth to boot. The strength in residential construction has been supported by renovation activity – as homebuyers renovate their new purchases, and sellers attempt to add value to their homes before putting them on the
market. Homebuilders have begun to responded favourablyto strong housing demand, and in December housing starts rose for a third consecutive month – rising 5.9% from month ago levels. At 174,000 units, housing starts are now up 47% from the trough in April 2009. The strength in starts suggests new homebuilding likely grew in the range of 15-20% in the last quarter of 2009 alone.
While the impact of housing demand on economic growth has been favourable, the strength in home prices has gained the attention of policy markers for a different reason. Canadian existing home prices have been heated, growing close to 20% Y/Y in Q4 2009. Not only have home prices retraced the losses that occurred over the very short-lived correction early last year, but they are now well above pre-recession (and historical) peaks. Policy markers have noted that they are not currently worried about the level of
home prices, and this is just one mechanism through which monetary policy is working to help support the economic recovery. But if this momentum continues, it may signal that a bubble is indeed forming.
What would the Bank of Canada do in the event that a “housing bubble” does develop? Probably nothing. This
week, we heard a speech prepared by Timothy Lane, Deputy Governor of the Bank of Canada in which he reinforced the belief that central banks remain weary of using monetary policy to curb a bubble in the housing market, because it could curtail economic growth in the process. This is because
excluding housing related goods and services, other areas of the economy remain weak and require support from monetary stimulus. For instance, non-residential building permits were down 22% in November, indicating
yet another contraction in non-residential investment in the fourth quarter of 2009. Furthermore, import data suggest that following a strong positive third quarter, investment in quarter of the year.
Meanwhile, international trade data out this week underscore the belief that the export sector will continue to face drop in real terms in November, exports are currently on track for a second consecutive double digit quarterly gain in Q4 2009. But over much of the second half of 2009, restocking, and increased demand for autos from the American Cash for Clunkers program – both effects which are expected to be temporary. Indeed, sharp declines in foreign demand for industrial goods and materials, machinery and equipment, and automotive products in November suggest that the inventory restocking process is already slowinig.
Moving into 2010, the export sector still has to contend with a strong Canadian currency.
The loonie is slowly creeping towards parity – and this week breeched the 97 U.S. cent level. If the Bank of Canada were to react to the housing market, and move earlier and more aggressively with interest rate hikes, it would risk pushing the loonie up sharply, putting more pressure on the
already struggling export sector. Instead, if a housing bubble does form, there are other tools at hand. For instance, federal government authorities would introduce regulation, such as
controls on leverage ratios, higher minimum down payment requirements, shorter maximum mortgage amortization periods, or other tighter terms and conditions for mortgage
insurance, to help temper demand for housing. And the federal government has hinted that it would be willing to introduce these regulations, if need be.
So what does all this mean to the home buyer standing on the sidelines. Mortgage rates are at historic lows with 5 year fixed rate mortgages available at 3.75% and variable rate mortgages as low as 2.25%. With the Canadain Government likely to use regulatory measures to cool down the housing market it could cost you more money to purchase a home in the form of larger downpayment requirements. It could also push those with less than perfect credit and slighltly higher debt loads out of the market. I can help you find the perfect home in Windsor Ontario before it’s too late. Visit the #1 source for Windsor real estate. We are here to help!