Eric Shackleton
Other
TORONTO – Analysts say rising mortgage rates are expected to further soften Canada‘s housing market as affordability erodes, sales cool and the economy in many parts of the country blows off more steam.
Their comments Monday follow last week’s half percentage point rise in mortgage rates, and a report by the Canadian Real Estate Association showing that a flood of homes onto the market sent resale listings to their second consecutive record level in May as sales slowed and price gains cooled.
Mortgage rates are expected to keep on rising as the Bank of Canada shifts its focus to taming inflation from stimulating the economy with rate cuts.
Higher rates will “certainly affect people … who are at the margins of affordability,” said Gregory Klump, chief economist at the Canadian Real Estate Association, or CREA.
Robert Kavcic, an analyst with BMO Capital Markets, says “we’ll probably see a continued cooling trend for the rest of the year and probably into next year” in the housing market as the economy sputters and mortgage rates move up.
“The trend is definitely higher” with rates, said Kavcic. “That’s just another hit to the demand side,” along with rising food and energy costs.
While the Bank of Montreal does not expect the Bank of Canada to hike its key rate until 2009 – good news for homeowners whose loans float and are tied to the banks’ prime rate – mortgages linked to the bond market are moving higher now, he said.
“I don’t think it’s going to be short and fast, but the cost of borrowing should definitely trend higher over the next couple of years.”
The recent half a percentage point rise in five-year fixed term mortgages, said Scotia Economics analyst Aron Gampel, is “a reflection of the changing sentiment” in the bond markets., where banks finance their mortgage lending.
Average customers now face a discounted rate of about 6.09 per cent for a five-year fixed term, compared with the earlier rate of 5.59 per cent.
“Longer-term mortgages, in particular, are priced off the longer end of the bond market,” said Gampel.
“What we’ve been seeing is that while growth expectations have been reduced, inflation expectations have been increased substantially on the back of the sharp and sustained rise” in energy and food prices, he said.
Central bankers, he said, have been caught off guard “with their earlier focus on growth now has to change to a renewed focus on inflation … their No. 1 mandate.”
Said Gampel, “we have this juxtaposition where global growth is still strong enough to put upward pressure on commodity prices which is fuelling inflation even in those countries where growth pressures have diminished quite substantially.”
Kavcic said the upward pressure on mortgage rates will “certainly take the steam out of it (the housing market) that we’ve seen. But given that the pace is going to be pretty slow, it’s not going to be a crippling blow.”
The country’s economy has been slowing since last summer following the subprime mortgage crisis in the U.S. and resulting worldwide credit crunch.
Falling consumer confidence and demand in the U.S. and the high Canadian dollar have hurt the country’s export sensitive auto, forestry and housing sectors, leading to plant and mill closings and thousands of job losses and layoffs, especially in manufacturing orientated Ontario and Quebec.
Last month, there were 54,029 new listings of resale housing units in major markets, a 2.2 per cent increase over the seasonally adjusted record hit in April, according to data released by CREA.
On an unadjusted basis, listings rose to 67,628 units, up seven per cent from May 2007.
Year-over-year sales, however, fell in 18 of the 20 markets. Unit sales across Canada dropped by 17 per cent in May from the year before on an unadjusted basis, and by 0.5 per cent compared with April 2008, on a seassonally adjusted basis.
Prices rose one per cent in May from a year earlier to $337,071, a new record for the average price, but the smallest hike in more than seven years.
Klump said “rising food, fuel and home prices are denting consumer confidence,” while continuing price increases are eroding affordability.
Increasingly, he said, “cautious home buyers may keep listings on the market longer before being sold, which increases the importance of realistic pricing.”
CREA is “looking at an 11.5 per cent decline in sales activity this year and a further four per cent decline in activity next year. Prices are forecast to continue rising this year and next,” said Klump.
Canadians, said Kavcic, can expect to see a more balanced housing market by the end of the year.
“Sales are down pretty sharply year-over-year and listings are up sharply year-over-year. But there are still pretty elevated housing starts in a lot of the segments” especially condos in Toronto.
“There could be a bit of balancing ahead in terms of those new condos coming on the market and then prices having to adjust down if demand softens with higher mortgage rates.”
