August 21, 2019

Canada’s housing market: ‘Slowdown postponed’

Michael Babad
Globe and Mail Update
Housing outlook
A new report on Canada’s housing market carries this notable title: “Slowdown postponed.”

Facebook, Washington team on jobs The report from National Bank Financial is in line with other forecasts, projecting the market will slow in 2012 and 2013, but it won’t crash. National Bank’s Shubha Khan also upgraded his projection for this year because of a stronger-than-expected third quarter and a longer-than-expected timeline for interest rate hikes in Canada.

“Given the resulting deterioration in the global economic outlook, the Bank of Canada is now expected to leave its policy rate unchanged until late 2012 or early 2013,” Mr. Khan said.

“Mortgage rates will almost certainly linger near their current historical lows for at least the next 12 months, which should prevent a pronounced slump in housing market activity. We previously expected rate hikes would materialize as early as [the fourth quarter of] 2011.”

Mr. Khan projects an 8-per-cent gain in the dollar value of home sales this year, a 3-per-cent dip in 2012 and a 5-per-cent decline a year later.

“Given our interest rate outlook, housing affordability is projected to be stable through 2012, which suggests that home prices are unlikely to adjust materially next year,” Mr. Khan added in a discussion about the debt service ratio, or DSR, for mortgages.

The DSR, or what’s needed in terms of a household’s disposable income to meet its monthly payments, now stands at 21.6 per cent, compared to a 20-year average of 20 per cent.

“In 2013, however, rising interest rates will result in a significant deterioration of the DSR … pricing many potential buyers out of the market unless (i) home prices decline or (ii) households’ appetite for credit expands (i.e. households tolerate a higher DSR),” he said in the report.
“With the weak global economy weighing on consumer confidence and non-mortgage credit at record levels, this appetite is unlikely to grow. Therefore, home prices will have to fall, in our view … we estimate that the average home price will have to decline by around 9 per cent from current levels if, as we expect, mortgage rates increase by 100 to 150 basis points in 2013.”

Inflation in Canada is running a bit hotter than expected, suggesting that weak economic growth “hasn’t done much to dampen price pressures,” according to Emanuella Enenajor of CIBC World Markets.

Consumer prices rose 0.2 per cent in September – 0.3 per cent when seasonally adjusted – bringing the annual pace to 3.2 per cent. The so-called core rate, which excludes volatile items and guides the Bank of Canada, rose to 2.2 per cent. That’s the first time it has come in above the 2-per-cent mark since February of last year.

That’s not likely to change the Bank of Canada’s course in the near term, but it is tempering suggestions that Governor Mark Carney could cut his benchmark rate.

“The point remains that near-term inflation readings are set on the backburner by a central bank that is pursuing price level targeting in a de facto sense anyway,” said Derek Holt and Karen Cordes Woods of Scotia Capital.

“The BoC is not doing so explicitly as its current inflation targeting mandate affords plenty of flexibility, but when Governor Carney reiterates that the BoC has allowed achieving its inflation target to vary over time horizons stretching from two to 12 quarters, the implication is that the current inflation targeting mandate gives the BoC plenty of latitude toward looking through near-term inflation readings that it can’t influence anyway. That leaves it primarily focused upon a growth bias and financial stability concerns as it remains on the sidelines throughout the next year.”

Global stock markets are taking the France-German stalemate in stride so far this morning, still hoping for a deal of some sorts that will help ease Europe’s debt crisis.

Tokyo’s Nikkei was little changed, while Hong Kong’s Hang Seng gained 0.2 per cent. In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were up by between 1.3 per cent and 1.8 per cent by about 9 a.m. ET.

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