By Michael Taube Last Updated: July 21, 2010 12:02pm
GTA resale home transactions for June were down 23% from last year’s level — no surprise, as the real estate market has been saturated with overpriced homes, high volume of sales, and a wide variety of houses available for purchase for some time.
Toronto had to go through a real estate correction — not only because this is the way the market works, but also because asking (and final sale) home prices were out of whack, to put it mildly.
With housing rates falling, some people are concerned mortgage rates will start to rapidly increase — with Tuesday’s quarter-point hike being just the start.
The thinking is banks will need to hike 1-5 year mortgages to make up for the shortfall in sales. This will lead to more home defaults and foreclosures, reduce investor confidence, and create a drain on our economy — just like what happened in the U.S.
That’s what some people think. I’m not one of them.
I believe mortgage rates will gradually increase over the next year or two, but not as high as some fear.
Long-term mortgage rates (three years and up) follow the bond market. If bond yields are high, banks will usually spike mortgage rates to make up for funding costs. If bond yields remain low, mortgage rates also remain low.
Meanwhile, the correction in a real estate market does not mean market collapse. A repeat of the U.S. mortgage meltdown won’t happen here.
The subprime mortgage crisis was, in former U.S. Federal Reserve chairman Alan Greenspan’s view, “an accident waiting to happen.”
He’s right. It was a preventable accident. High-risk loans given to people with lousy credit was a bubble waiting to burst.
The late department store tycoon Marshall Field had a simple motto, “Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”
That’s what happened in the U.S. While we blame “greedy” businessmen, “arrogant” government officials, or “dim-witted” low-income families for this financial mess, everyone had their fingers in the pie — and enjoyed the filling a bit too much.
In Canada, we don’t offer subprime mortgages to potential clients. Most importantly, credit checks matter.
If you don’t have sufficient personal income or assets, you ain’t getting the deed to the house.
As well, the Canadian economy continues to chug along. According to Statistics Canada, 93,000 new jobs were created in June, and most jobs lost during the recession have now been recovered. As long as our economy remains on track, real estate will not collapse in Toronto.
It’s up to federal politicians — and, to a lesser extent, provincial and municipal politicians — to ensure economic growth remains a priority so the real estate correction doesn’t become a real estate collapse.
But it’s also up to voters. If pro-business and pro-development forces are in charge of our political futures, the economy should remain on solid footing, bond yields should remain low, and mortgage rates should remain stable.
If not, the future of real estate in our fair city could be up in the air.
— Taube is a former speechwriter for PM Stephen Harper. His family has been involved in mortgages for more than 50 years
Showing posts with label long-term mortgages. Show all posts
Showing posts with label long-term mortgages. Show all posts
Wednesday, July 21, 2010
Friday, July 16, 2010
Canadian real estate: A soft landing or something worse?
CTV News - July 16, 2010
Michael Babad
These are stories Report on Business is following today. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.
Housing market pace slows
Canada's housing market is cooling off after its record-setting pace in the post-recession period. The Canadian Real Estate Association said today existing home sales fell 8.2 per cent in June from a month earlier, largely because of a slower pace in Toronto and Calgary. The national average resale price dipped 1.2 per cent, to $342,662, from May's record $346,881. That's still almost 5 per cent above last year's prices. Here are the views of four economists:
Adrienne Warren, Bank of Nova Scotia: "We expect to see a further slowing in sales over the second half of the year as interest rates gradually drift up. (It should be noted, however, that sales are still at a historically high level despite this year’s pullback, supported by improving employment conditions and still-low borrowing costs.) While this in turn will likely put some further modest downward pressure on prices, listings are also beginning to trend lower, which will help to maintain a fairly healthy balance between buyers and sellers."
David Rosenberg, Gluskin Sheff + Associates: "The Canadian housing market at one point during last year's parabolic surge in sales and pricing got as much as 20 per cent overvalued. In recent months, demand has weakened under the weight of eroding homeowner affordability. At the same time, the rush of new construction has elevated the supply side of the equation. and so what falls out these shifting demand and supply curves is a reduction in prices - the long awaited correction is here. Remember - excesses in one direction are generally followed by excesses in the other direction. And bubbles never correct by going sideways. In a nutshell, there's more air to come out of this Canadian housing balloon."
Douglas Porter, BMO Nesbitt Burns: "By some appearances, Canadian home sales have done their best impression of a capsized canoe in the wake of the new tighter mortgage insurance rules and the modest back-up in borrowing costs in the spring. Sales were also front-end loaded in 2010 ahead of the [harmonized sales tax] and are now in rapid reverse. While the headlines may look soggy for the next few months, there are reasons to believe the market could soon regain its balance - long-term mortgage rates have dropped, employment remains on a roll, and prices have stabilized."
Pascal Gauthier, Toronto-Dominion Bank: "After improving markedly in 2008, home affordability eroded significantly in 2009. With the typical lag, this is naturally slowing the pace of sales. Nonetheless, the housing market slowdown should be cushioned by an improving employment and income picture. The level of interest rates remains quite supportive of sales activity, and rising interest rates would only occur against a stronger overall economic backdrop."
Michael Babad
These are stories Report on Business is following today. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.
Housing market pace slows
Canada's housing market is cooling off after its record-setting pace in the post-recession period. The Canadian Real Estate Association said today existing home sales fell 8.2 per cent in June from a month earlier, largely because of a slower pace in Toronto and Calgary. The national average resale price dipped 1.2 per cent, to $342,662, from May's record $346,881. That's still almost 5 per cent above last year's prices. Here are the views of four economists:
Adrienne Warren, Bank of Nova Scotia: "We expect to see a further slowing in sales over the second half of the year as interest rates gradually drift up. (It should be noted, however, that sales are still at a historically high level despite this year’s pullback, supported by improving employment conditions and still-low borrowing costs.) While this in turn will likely put some further modest downward pressure on prices, listings are also beginning to trend lower, which will help to maintain a fairly healthy balance between buyers and sellers."
David Rosenberg, Gluskin Sheff + Associates: "The Canadian housing market at one point during last year's parabolic surge in sales and pricing got as much as 20 per cent overvalued. In recent months, demand has weakened under the weight of eroding homeowner affordability. At the same time, the rush of new construction has elevated the supply side of the equation. and so what falls out these shifting demand and supply curves is a reduction in prices - the long awaited correction is here. Remember - excesses in one direction are generally followed by excesses in the other direction. And bubbles never correct by going sideways. In a nutshell, there's more air to come out of this Canadian housing balloon."
Douglas Porter, BMO Nesbitt Burns: "By some appearances, Canadian home sales have done their best impression of a capsized canoe in the wake of the new tighter mortgage insurance rules and the modest back-up in borrowing costs in the spring. Sales were also front-end loaded in 2010 ahead of the [harmonized sales tax] and are now in rapid reverse. While the headlines may look soggy for the next few months, there are reasons to believe the market could soon regain its balance - long-term mortgage rates have dropped, employment remains on a roll, and prices have stabilized."
Pascal Gauthier, Toronto-Dominion Bank: "After improving markedly in 2008, home affordability eroded significantly in 2009. With the typical lag, this is naturally slowing the pace of sales. Nonetheless, the housing market slowdown should be cushioned by an improving employment and income picture. The level of interest rates remains quite supportive of sales activity, and rising interest rates would only occur against a stronger overall economic backdrop."
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