A strong international demand for bonds from Canada's biggest banks is trickling through the system and pushing mortgage rates to record lows at the consumer level. The Bank of Montreal moved its five-year fixed mortgage rate to 2.99 per cent late Thursday — the lowest posted rate from a major bank in Canadian history. BMO announced the rate cut late on Thursday and TD followed suit by lowering their four-year fixed rate to 2.99 per cent on Friday afternoon. BMO's offer, which ends Jan. 25, states that lump sum payments are limited to 10 per cent of the principal each year. The mortgage is also based on a 25-year amortization period. TD's offer is open until Feb. 29, 2012. It's also for a four-year term, much less common than the standard five-year. Other banks are expected to follow suit. On Wednesday, Toronto-Dominion Bank reduced its posted six-year rate 132 basis points to 3.79 per cent and lowered the posted seven-year fixed rate 91 basis points to 3.99 per cent.
REGIONAL HOUSING MARKETS: A YEAR IN REVIEW AND A LOOK AHEAD
Gradual unwinding of the over-valuation in house prices across the country
Highlights
As the year draws to a close, we conclude that the Canadian housing market put forth a respectable showing. Annual price gains are estimated at 7.5% in 2011 and sales’ growth ought to come in positive as well, but at a much more modest pace of 2.2%.
Behind the headline figure, we have seen gains in prices and sales activity decelerate in recent months. Some of the underlying factors include tighter insured mortgage financing rules and weakened confidence related to the stability of the economic recovery. Helping cushion the impact of these negative forces has been the persistence of low mortgage rates.
We believe that the average Canadian home price is over-valued by roughly 10%. Metrics like price to income, price to rent, and affordability all support this conclusion. We expect that the price excess will gradually unwind over the next two years in light of a softening in employment conditions in 2012 followed by higher interest rates in 2013.
In contrast to the resale market, starts continue to come in well above expectations. The strength witnessed over the last few years has been driven exclusively by the multi-residential category. Consistent with weaker resale markets, we expect new starts to trend toward 170,000-180,000 units in the 2012-13 period.
In addition to our national perspective, we provide an in-depth forecast of twelve major markets. While no urban center will be immune to the macroeconomic and interest rate headwinds, Calgary and Edmonton are likely to do better than the rest. By contrast, a larger-than-average price and sales correction looks to be in store for both Toronto and Vancouver.
Homebuyers came out in the early part of 2011 to take advantage of record-low interest rates and to beat out changes to new insured mortgage financing rules. With Canadians bringing forward their purchases and national job gains tapering off since the autumn, the past few months have recorded more modest price and sales gains. In all, 2011 put forth a very respectable showing with price appreciation clocking in at an estimated 7.5% and sales growth also positive, but at a more modest 2.2%. At around 190,000 units, housing starts also continued to come in above long-run averages.
Looking ahead, we anticipate a tug-of-war action to take hold in the Canadian real estate market. At one of the rope is the magnetism of low interest rates; at the other end are subdued prospects for economic, income and employment growth. Ultimately, we expect the economic side of the equation to win out over the near-term. In particular, the first half of 2012 is likely to be characterized by ongoing confidence-sapping events in Europe, global financial turbulence and slowing world economic growth.
While housing activity is expected to do somewhat better in the second half of the year, as external clouds start to dissipate, rising Canadian interest rates in 2013 should erect the next road block in the way of housing markets. Overall, we expect sales to record annual average declines of 2.4% and 3.5% in 2012 and 2013, respectively. Prices are poised to suffer a similar fate – annual average declines of 1.9% in 2012 and 3.6% in 2013. Starts should dip to an average 170,000 to 180,000 units in 2012-13. Collectively, these adjustments will gradually erase the over-valuation in the marketplace.
While no urban center will be immune from economic volatility and higher prevailing interest rates, some regions are expected to do better than others over the next two years. Among the twelve major markets profiled in this report, Calgary and Edmonton ought to lead the pack. Solid economic fundamentals and the absence of a recent run-up in prices support our call. Toronto and Vancouver do not appear to be as lucky – we have them experiencing a greater-than-average correction in both sales and prices...
BC Real Estate Association (BCREA) Chief Economist Cameron Muir discusses the July 2011 statistics and an in depth look at the seasonal adjustment of housing statistics.
As expected, the Bank of Canada maintained the policy rate at 1.00% today; however, the Bank assumed a more aggressive tone with respect to the outlook saying that "some of the considerable monetary policy stimulus currently in place will be withdrawn." This is a step up from the May statement, which projected that stimulus would be "eventually withdrawn." On the outlook for the global economy, the Bank reiterated that the expansion is proceeding as it expected in the April forecast. On global inflation, the Bank maintained that global pressures have broadened as strong growth in the emerging markets keeps upward pressure on commodity prices. The Bank expects that commodity prices will remain at elevated levels. Importantly, the Bank's forecast assumes that the European sovereign-debt crisis will be contained.
Recent data and the prospect of stronger growth going forward suggest that domestic conditions warrant higher interest rates. This is especially true in light of the stronger than expected inflation and employment numbers lately. The Bank's decision, however, to maintain the policy rate at 1.0% reflects lingering concerns about the pass through of external developments on Canada's economy. Uncertainty about U.S. and Eurozone fiscal policy, and the likelihood that there will be significant steps made toward the resolution of their fiscal challenges to placate financial markets is keeping alive the potential for global risk premia to rise. Even with its superior economic and fiscal fundamentals, it is unlikely that Canadian financial markets will be able to avoid coming under pressure should this occur.
While these external risks bear watching, the Bank still expects Canada's economy to post stronger growth in the second half of 2011, supported by very stimulative financial conditions. Similar to the Bank, our base case forecast is that the global economy will avoid a replay of 2008's financial market crisis and ensuing economic recession. After growing at a projected 2% annualized pace in the second quarter of 2011, we forecast the economy will accelerate with real GDP rising at a 4% average annualized pace in the second half of the year. Backing out the Bank's second-half 2011 growth forecast based on its 2011 projection that the economy will grow by 2.8% in 2011 suggests that our forecast is for Canada's economy to grow at a stronger clip in the final six months of the year. More details of the Bank's quarterly projections will be in tomorrow's Monetary Policy Report.
The Bank acknowledged that inflation has been running hotter than expected. The core rate is likely to average 1.7% in the second quarter of 2011 and the headline rate at 3.5%, with the June data to be reported on Friday sealing the second quarter of 2011. The Bank expects that headline inflation rate will hold above 3% in the near term, with core inflation now expected to "remain around 2% over the projection horizon." Persistently higher than expected services prices were attributed with the firmer than expected core rate. The Bank maintained its assessment that the headline rate will converge to the 2% target in the middle of next year. To that end, the Bank indicated that with the expansion expected to continue and excess slack absorbed, some of the current policy stimulus "will be withdrawn." Looking ahead, some of the key international issues are coming to a head in the weeks ahead and will give the Bank a clearer view about the global outlook when it meets again in September. Our expectation that the global economy will avoid another crisis sets the stage for Canada's domestic economy to reaccelerate and for the Bank to make good on its promise to withdraw "some of the considerable monetary policy stimulus currently in place" with the case for a September hike supported by today's statement.
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