TORONTO — The Bank of Canada’s surprising signal last
week that it will not raise interest rates any time soon will lift the housing
market and give indebted households breathing room, but it leaves many
apprehensive there will be a hard reckoning.
Canada sidestepped the worst of the financial crisis
because it avoided the real estate excesses of its U.S. neighbour, and a
post-recession housing boom helped it recover more quickly than its Group of
Seven peers.
But the housing market began to cool last year after
Prime Minister Stephen Harper’s Conservative government, worried about a
potential property bubble, tightened mortgage rules.
Debt is
at record levels, and we know consumers are biting off more than they can chew
The prospect of lower-for-longer interest rates, needed
to help a struggling economy, has revived those bubble fears.
“This is a double-edged sword,” said Laurie Campbell,
chief executive at Credit Canada, a nonprofit credit counselling agency that is
funded by banks and other lenders.
“It’s going to keep more home buyers in the market, but …
I worry. Because, fine, interest rates are going to be stable and (home buyers)
can get a good rate, but are they getting into the market only because of that?
Debt is at record levels, and we know consumers are biting off more than they
can chew financially, so does this lead to more problems down the road?”
Finance Minister Jim Flaherty said Monday he intends to
get more directly involved with players in the housing sector to ensure the
market doesn’t over heat.
Flaherty says the responsibility of keeping the market
stable falls on his department.
The central bank’s position comes amid signs home sales
and prices are regaining momentum after cooling last year when Flaherty clamped
down on mortgage rules.
Flaherty says he speaks regularly with market players,
but is going to do more of it now to ensure the recent pick-up in sales and
prices is a temporary phenomenon, and not the early signs of a housing bubble.
He says at the present time he has no intention of
intervening by clamping down on borrowing.
Most analysts say he could take the steam out of the
market by increasing the minimum requirement for a down payment to buy a new
home.
BROKERS SEE FRESH BOOM
The Bank of Canada has underpinned the housing market by
holding its key policy rate at a near-record low of 1% since 2010. But early
last year, worried by soaring household debt levels, it began warning its next
move would be a rate hike and that Canadians should plan accordingly.
But even as it continued to acknowledge the problem of
soaring debt levels in its latest report on Wednesday, it dropped that
language, putting more emphasis on the risks of weak inflation and an economy
still operating well below potential,
The bank’s omission of the rate warning left players in
the housing market anticipating a renewed surge of strength.
“What is going to happen is rates are going to be lower
for longer, and that means it is more appealing for buyers to get into the
market,” said Kim Gibbons, a mortgage broker in Toronto.
Already, brokers are seeing borrowers shifting back to
variable rate mortgages as home buyers bet rates will stay at ultra-low levels
for a few more years. When rates had looked like they were on the rise,
fixed-rate mortgages seemed the safer bet, locking in a low rate before costs
rise.
I would
suspect that we’ll see a significant trend away from longer-term fixed into
shorter-term variable rates
A five-year variable rate mortgage at 2.5% allows a
borrower to lower the early cost of a loan, compared with a five-year fixed
rate at 3.5 or 4 %. Effectively, that allows them to borrow more and buy a more
expensive house.
A Reuters poll published on Thursday showed primary bond
dealers, who work directly with the central bank, now expect interest rates to
stay on hold until the second quarter of 2015.
“With the BOC keeping rates low for a long period of
time, I would suspect that we’ll see a significant trend away from longer-term
fixed into shorter-term variable rates,” said Toronto broker Calum Ross.
“What we know in the housing sector is people don’t buy
prices, they buy payments. So if the payment shock isn’t there … they’ll buy a
payment today not having realistic expectations about what the long-term budget
implications are.”
The long-term implications of Canada’s huge household
debt burden is part of what had driven Bank of Canada policymakers, along with
officials at the Finance Department, to repeatedly warn Canadians that their
debt burden will become harder to bear when interest rates rise eventually.
Canada’s debt-to-income ratio reached a historical high
of 163.4% in the second quarter, meaning Canadians owed C$1.63 for every C$1.00
they were bringing home.
Low interest rates were partly to blame as Canadians
reached for ever-larger mortgages in a booming market for residential real
estate.
The federal government has tightened mortgage lending
rules four times in the past five years in a bid to cool the market and prevent
home buyers from taking on too much debt. And the Bank of Canada did its bit by
using the threat of rising interest rates to remind consumers that cheap money
would not last.
No longer. Having dropped the threat of raising interest
rates, analysts said the central bank has pushed the consequences of higher
levels of borrowing well into the future.
“(In the parlance of) Monopoly, we picked up a ‘Get out
of jail free’ card, and managed kick that can down the road several months and
probably not before 2015,” said David Rosenberg, chief economist at Gluskin
Sheff, who famously predicted the last U.S. housing crash.
“Household debt ratios are problematic, and the central
bank knows it, but … the good news out of bank is we’ve been told we have a
little more time to get our finances in order before the debt to service ratio
starts to play some catch-up.”
© Thomson Reuters 2013, with files from the Canadian
Press
