Regulatory changes alone are unlikely to fully address the imbalances in both housing valuations and debt-loads notes TD in a new report. While the incremental tightening in mortgage rules represents a good starting point, TD finds that as long as interest rates remain at their historically low levels, consumers has a powerful incentive to take on additional leverage and the overvaluation in Canadian housing will likely remain.
TD concludes that higher interest rates will ultimately be required over the next few years to ensure that Canada’s housing market and overall economy remain on a sustainable growth path.
- TD expects the new rules to shave 5 percentage points off sales and 3 percentage points off prices over the rest of 2012 and early 2013 and reduce about 1 percentage point off credit growth
- little doubt that first time home buyers – a market segment that have comprised as much as half of total Canadian sales in recent years – have been the most affected by the tightening in mortgage insurance rules
- Higher-priced markets where speculation or investment demand has been more significant have generally been more affected by the changes. Toronto was harder hit by the 2010 rule changes with home sales dropping a sharp 37% over the 3 months that followed the implementation date. The 2011 rule changes tooka bigger bite out of the Vancouver market, where sales dropped 27% in their immediate 6-month aftermath
- TD Economics’ estimate of the current over-valuation, as measured by the gap between actual and modeled prices, stands at about 10 to
15%, which is in the ballpark of most other estimates
TD ends the report by calling out Mr. Carney:
“The next step in tempering domestic imbalances will have to come from the Bank of Canada. Interest rates simply cannot stay at current levels indefinitely”
You can download the entire report here