The following factors will shape the housing market this year:
Interest Rates. The Bank of Canada has made a tentative commitment to keep rates at current historic lows until the middle of this year. Question is, by how much and how quick will rates then be raised? Fixed rate mortgages are an entirely different animal as it’s shaped by bond yields which have started to rebound.
5 year Canadian Bond in 2009. Source: Bloomberg
How much impact have low interest rates had on the market? Can it be the cause of a bubble forming in Canada?
Today, speaking of the U.S. housing market, Fed Chairman Ben Bernanke said the Federal Reserve had a role in inflating the housing bubble, but it wasn’t low interest rates in the U.S. that fueled speculation in housing worldwide. He concluded that low interest rates were responsible for about 5% of the change in housing prices, while greater global capital flows explained about 30% of the change. Mr. Bernanke also said the biggest cause of the bubble was exotic mortgages and the decline in underwriting standards.
He goes on to say, “That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.” And if rates were raised earlier it “could have seriously weakened the economy at just the time when the recovery from the previous recession was becoming established.” (Read his entire speech here)
Whether or not low interest rates in Canada have fueled a bubble remains to be seen. In the meantime, a regulatory response may be in the works.
5/35 – Mortgage Rules. Finance Minister Jim Flaherty has warned that he might tighten lending rules by increasing minimum downpayments and decreasing the maximum amortization allowable. This is a possible game changer as it will instantly cut-off potential buyers. Good news: those buyers probably weren’t in a financially prudent position to buy in the first place. Bad news: first time buyers drive the market and its effect will be far reaching. It all depends on how much the government tweaks the rules, keeping in mind that interest rates will be rising as well.
Penalties: Interest Rate Differential. With interest rates rising, it will open the door to many sellers who were unable to sell due to the huge penalty they would incur because of the interest rate spread (more on Calculating Payout Penalties)
Inventory. In Calgary, currently at its lowest point since early 2007. Rising home prices could bring out the sellers that mysteriously disappeared in 2009. Or they might hold on expecting prices to rise further. If buyer demand (which led to record sales levels this past summer) wasn’t pulled forward from the year ahead as some have surmised, it could result in emotional bidding wars for homes in short supply. We’ll also see whether new home builders were able to ramp up production to alleviate the shortage come this spring. Certainly a lot of variables.
Unemployment. Alberta’s unemployment rate had more than doubled from 3.1% to 7.5% in just over a year and a half. The last reported stat in November had the rate at 7.4%. Although this is much lower than the 12%+ recorded in the 80′s it will be important to keep an eye out on this statistic as it will affect peoples ability to keep their homes.
Canada-wide, the unemployment rate also dropped by 0.1% in November to 8.5%. Despite November’s gain in employment, there were 321,000 (-1.9%) less people employed than the peak of October 2008.
Canadian Unemployment Rate. Source: Statistics Canada
Mortgage Arrears. Not surprising that mortgage arrears have also risen from year ago levels. According to the Canadian Bankers Association, mortgages in arrears in October 2009 accounted for 0.69% of all mortgages – tied for the highest % going back to 1990. (At the beginning of 2008 it was at 0.20%)
Inter-provincial Migration. For the first time 15 years, Alberta posted a loss in the 3rd quarter of 2009. However, the population did grow by about 0.44% due to international immigration and natural increases (more births than deaths) This migration might be having a larger impact on the rental market as evidenced next.
Apartment Rentals. Vacancy has doubled and rents are 4% lower from last year. The apartment vacancy rate in the Calgary region rose to 5.3% in October, up from 2.1% the previous year. That’s the highest level since 1993, but it’s forecast to drop in 2010 according to CMHC:
Then again, the forecast for 2009′s vacancy rate wasn’t very accurate:
Even with the YoY decrease in rates, Calgary still has the second highest average rental rate compared to all major cities in Canada.
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It will certainly be interesting to watch the year unfold.
