Monday, August 24, 2015

Housing slow down heralding a more balanced economy

For the past four years economists have been warning us of a slowdown in housing activity, of lowered house prices and of interest rate increases. None of which have come to pass, until now, with the exception of interest rate increases and clearly, no one really knows what will happen with rates.

“Real estate, it has nine lives,” said Benjamin Tal, deputy chief economist at CIBC in an interview with the Globe and Mail. “Every time it’s supposed to slow down because of interest rates, something bad happens elsewhere that keeps interest rates low…”

Here are the most recent predictions from the Canada Mortgage and Housing Agency (CMHC).
New-home construction will slow over the next two years as low oil prices continue to take their toll on the economy despite rock-bottom interest rates.  Prices of resale homes will rise 3.4% this year before slowing to 1.5%.

Oil-dependent provinces such as Alberta and Saskatchewan will be hit hardest.  Home prices will likely decrease below the national average in Alberta.

In the rest of Canada the slowdown will be due to the shifting preferences among buyers. Where once buyers set their sights on higher-priced, newly built detached homes, they will start looking at buying older entry-level resale homes and more affordable new builds, such as townhouses and condos.  A healthy supply of condos and townies has kept those prices more affordable.

In Canada’s two high-priced markets – Vancouver and Toronto, demand for detached homes may fall because they are just not as affordable. However, just outside of these two hubs, prices are affordable.
CMHC also predicts that mortgage rates will rise slightly over the next two years, with five-year posted rates set to range from 4% to 5.5% this year, rising to 4.2% to 6.2% next year – caveat: We’ll see.

Many economists also say that our housing market is overvalued. Some say upwards of 60% compared to rent, some say about 30%, but the consensus seems to be between 10% and 20%.  But we may be looking at the wrong comparison.  What’s really important is a mortgage holder’s ability to pay.  And that means people need to stay working. 

So far, job numbers are good. The unemployment rate is holding steady at 6.8 %. Compared to a year earlier, Canada has added 161,000 jobs (a gain of 0.9 per cent) and the total number of hours worked has grown by 1.2%. Full-time jobs have risen by 1.8% over the past year. 

However Canadians are carrying large debt loads. At last count in March the debt ratio was 163.6% -- a record high. However, in June the debt ratio declined. It appears that in a low interest rate environment, consumers pay down debt.   Benjamin Tal said in an interview, “We have seen in the past that Canadians use low interest rates to actually pay down debt faster, as opposed to add to their debt…”

It looks as if consumers don’t have a problem paying their debts…unless interest rates shoot up past “historical norms”.  Yet, how many years have to pass before something becomes history?  We’ve been living with low interest rates since 2008 – that’s seven years. It could be that low interest rates are now the “norm”.

We are living in times that are defying textbook scenarios on the economy. Clearly world economies have changed. It’s not likely that interest rates will skyrocket in the next few years, given what’s happening in the world; it is more likely they may start to increase… slightly. 

What we’re seeing today is the correction that economists predicted would happen two years ago. With it will come a more balanced, stable economy where people are happily working, who are able to pay their debts, where interest rates are “low normal” and  where house prices are affordable. 

In the end, economists will look back and say that everything unfolded as it should.