This week’s top stories include how the changes to the mortgage regulations have further cooled the Canadian housing market, how interest rates were left unchanged at this week’s Bank of Canada interest rate meeting, how an interest rate hike could affect many Canadian consumers, how the Bank of Canada expects the next four quarters to be weak, how household debt is expected to increase before it gets better and how consumer debt growth has begun to subside.
It seems that Canada’s housing market was already cooling before the government of Canada implemented new changes to the mortgage regulations. Existing home sales were already noted to be down 1.3% in the month of June from May and was down 4.4% from the same time in the previous year.
The national average home price was $369,399 in the month of June and was down 0.8% from the same time during the previous year according to the Canadian Real Estate Association (CREA). Doug Porter, deputy chief economist at BMO Capital Markets stated, “Even before the new mortgage rules kicked in, all signs suggest that the Canadian housing market was already cooling, the new rules will simply pull hard on a closing door. The new rules will chill a market that had already seen 16 of 26 markets post June sales drops. Vancouver is leading the way down, but four Southern Ontario cities also reported double-digit sales declines.”
Finance Minister Jim Flaherty implemented tighter mortgage lending guidelines in the month of June to control the expansion of a possible housing bubble in Canada. The main focus of the changes were around the Toronto condo market and rising household debt to income ratio’s. Although there was an expectation of an expected increase in mortgage applications with the new regulatory changes on the horizon, home buyers didn’t rush to make any purchases before the changes.
Gregory Klump, CREA’s chief economist stated, “That’s a big change compared to what we saw as a response to previously announced changes. It will take some time before the compound effect of previous and recent changes to regulations on Canada’s housing market becomes apparent.” It should be noted that Toronto has not yet witnessed any sort of correction and that housing prices continue to climb.
The average home price in Toronto is up 6.8% from the same period last year while the Vancouver market has declined by 13.3% from the same period last year. Sales have also decreased substantially in the Vancouver market while mortgage growth in Toronto continues to swell as housing sales continue. Calgary was noted to have the strongest market in Canada with sales up 16.7% in the past 12 months. What do you think of this? Please comment below.
Tuesday of this week saw the 15th consecutive time that the Bank of Canada (BoC) kept its overnight lending rate unchanged. The BoC noted that the economic recovering has been taken off course by many factors across the globe and noted that Canada is not the only country being affected by world turmoil.
The BoC’s statement to the public was that there would be no further interest rate cuts and that there could be a tightening of monetary policy in the near future. The BoC’s outlook on growth was also revised downward from 2.4% growth in 2012 and 2013 to 2.1% growth in 2011 and 2.3% growth in 2013. They did note that the economy would expand in 2014 by 2.5% and will not return to full capacity until mid 2013.
CIBC chief economist Avery Shenfeld commented, “To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate. The market is now pricing in an interest rate cut as the next move by the Bank of Canada, and Carney’s team is saying that’s unlikely.”
He was further noted as saying, “(The bank) is delaying a resumption of the kind of growth rates needed to get us back to full employment, but not giving up on the idea that that is coming in a year or so. This forecast could easily involve an interest rate hike early in 2013, but that’s going to depend very much, as the bank knows, on what policy-makers in the U.S. and Europe actually do.” What do you think of these comments and the outlook for the Canadian economy? Please comment below.
A national survey by Harris Decima was done on 1000 Canadians randomly and the results were surprising. Nearly 50% of the those surveyed stated that they would have difficulty keeping up with their debt or mortgage obligations if there was a significant interest rate increase in the near future.
29% of those surveyed stated that they would have difficulty meeting their monthly obligations if interest rates were to increase by as little as 2%. Another 29% stated that a 3% or 4% increase would pose a huge problem for them to meet their monthly obligations. The BoC kept the overnight lending rate at 1% on Tuesday of this week with another interest rate meeting scheduled for September of this year.
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The Bank of Canada (BoC) made comments on Wednesday this week, after the interest rate announcement, that the Canadian economic recovery is struggling to gain traction due to mounting global problems and softer conditions at home preventing Canada from sustaining growth.
The latest monetary policy overview of global and domestic conditions outlines that Canada is a victim of global issues as well as domestic issues that continue to keep growth and expansion below acceptable levels. They revised economic growth numbers downward to only 2.1% growth this year and 2.3% growth next year with only 2.5% growth in 2014. Wednesday’s release of actual data showed that this year will be quite disappointing for growth and that the next four quarters will be weaker than previously predicted.
Although the data has not yet been reviewed, it is expected that the second quarter (Q2) of this year will only show growth of 1.8% and will be substantially lower than expected. The BoC also noted that Canadian job expansion and creation will remain subdued for the reminder of this year. The report stated, “This outlook for the Canadian economy is weaker over the near term than anticipated. As a result, the Canadian economy is expected to continue to operate with a small amount of slack for somewhat longer than previously anticipated and will not return to full capacity until the second half of next year.” What do you think of the BoC’s statements? Please comment below.
According to the Bank of Canada (BoC), Canadians will see their debt burden increase in the up and coming months even though the government has stepped in and tightened mortgage rules. The BoC also pointed to signs of overbuilding in the Canadian housing market, which will cause supply to outstrip demand and lower prices once the builds are completed.
The warning comes at the same time that the BoC downgraded quarterly economic growth forecasts until mid 2013 as weaker than expected domestic demand takes its toll on the Canadian economy. Even though the BoC held interest rates at 1% on Tuesday, they did note that there is a need to increase rates to fend off over borrowing of cheap money by consumers. Majority of investors feel that this will go the opposite way and that the central bank will cut rates as the European crisis continues.
BoC governor Mark Carney was asked about Canada running counter to other countries such as the U.S. and was noted to have said, “Global monetary policy isn’t a cut and paste situation. There is a very small amount of excess capacity in the economy and interest rates at 1% are already very low. Despite the lower forecast for household spending … the bank continues to expect further increases in the household debt-to-income ratio in coming quarters.”
Debt to income ratio of Canadian households has reached an all time high of 152% in the first quarter (Q1) of this year as consumers take advantage of ultra low interest rates and borrowing costs. This has provided an opening for more consumers to get into the Canadian housing market and take on more debt than ever before. Household debt continues to be the number one domestic risk to the Canadian economy. What do you think? Are we over borrowing with cheap accessible money at our hands? Please comment below.
According to a consumer credit study released yesterday, consumer debt growth has subsided and is 30% lower in the second quarter (Q2) of this year than it was during the same period last year. Equifax Canada’s quarterly consumer credit trends report found that consumer debt grew by 3.1% year over year, excluding mortgage debt, and was down from 4.4% from Q2 in 2011.
The same study showed that credit card debt was down 3.8% and consumer bankruptcies had declined 4.5% from the previous year. Bank loans and lines of credit showed minor growth when compared to a year earlier. Nadim Abdo, vice president of consulting and analytical services at Equifax Canada commented, “For the last couple of years we have seen almost double digit growth in some cases, it slowed down a bit last year, but we have never seen it slow down as much as we have (in the second quarter) probably for the past five or six years.”
The largest increase in outstanding balances was for non bank loans for auto financing and leases, which were up 8% from Q2 of last year. Average bank term loans increased by 3.4% with lines of credit only increasing by 0.5%. Most of the growth was accounted to existing credit lines rather than new accounts that were opened.
Mr. Abdo commented further, “We remain to be in a very low interest rate environment, so you might expect people to borrow more but maybe they are listening to the Minister of Finance and other people who are encouraging them to deleverage. We are seeing, not deleveraging, but certainly a significant slowdown in the growth rate of credit this quarter.” What do you think? Please comment below.
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