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Canadian Housing Market – April 2012

Good morning, interesting article as attached.

Philip DeMont
26 April 2012
The Toronto Star

Canadian homeowners might be asking themselves “to buy or not to buy” as they ponder whether now is their last best chance to jump into the country’s super-heated housing market.

Interest rates look to be heading north, the federal government is tightening up on rules that should make it harder for consumers to borrow and banks to lend more money for new homes, and Canada’s economy is expanding at a lower rate of growth, capping individual incomes.

In recent months, international capital markets have started expecting Canadian interest rates to climb, economists say.
“We have seen a weakening in the bond market,” notes Doug Porter, deputy chief economist at BMO Capital Markets.
According to the Bank of Canada, the yield for five-year Government of Canada bonds reached 1.57 per cent in March 2012 compared to 1.28 per cent in December 2011.

While the absolute level of the change might appear small, the percentage gain in yields was actually 25 per cent over the past three months.
And this jump in bond returns basically means money markets are cutting the price they pay for these medium-term bonds, because they believe interest rates are set to rise.

“There are mounting signs that the tide is, indeed, turning for rates,” Porter says.
Regulatory squeeze

A factor dampening housing enthusiasm is the promise by Federal Finance Minster Jim Flaherty in the March federal budget to monitor the level of mortgage lending by the Canada Mortgage and Housing Corp., the federal agency that helps potential homeowners get into the market.

The Finance Minister expressed concerns that CMHC was providing insurance backing for too many mortgages just as borrowing costs are set to surge presumably with a resultant rise in the default rate among homeowners.
Also, Ottawa wants to put in place new rules about covered bonds, a financial instrument banks use to lower the cost of mortgages for buyers.

All these factors have led many experts to believe Canada’s home market is set to slow towards the end of 2012.
On the other hand

Not everyone, however, is on board with the ‘clouds-forming-on-the-horizon’ theory of Canada’s current housing market.
“It’s just too early to say,” says Colette Delaney, executive vice-president of mortgage, lending, insurance and deposit products at the Canadian Imperial Bank of Commerce.

Delaney is not disputing the thinking that Canadian interest rates are headed higher later in 2012. What she is questioning, however, is whether unsuspecting homebuyers will start bidding for new homes as soon as borrowing costs move upwards at all. “I think they have already priced higher interest rates into their buying decision,” she says.

Fixed versus variable

Historically, many borrowers have stuck to a variable rate when they negotiate bank borrowings. That is because adjusted-interest-rate mortgages usually come with a lower rate than fixed-rate loans.

That sentiment is changing.

That CIBC poll indicated that one in two Canadians would borrow money at a fixed rate, up from 39 per cent, who, in the similar poll in 2011, answered “yes” to the question.

That shift should not come as a surprise, BMO’s Porter indicates, as mortgage rates have been at very low levels for many months now.
“Current offers on long-term mortgage rates and the recent shift in bond market sentiment tilt the balance heavily in favour of locking in at this stage,” he wrote in a March 23 note.

If the CIBC’s Delaney is correct, rising rates might not force Canadians into a life-changing Shakespearean debate about buying a new home.
Instead, they might wind up discussing the more mundane question of whether to cement the rates on offer into a new mortgage.