Real Estate Reigns, Cheap Money Rules

Low rate pledge seen recharging Canada’s housing boom

The Bank of Canada’s surprising signal on Wednesday 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 the country’s Conservative government, worried about a potential property bubble, tightened mortgage rules.

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 counseling 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?”

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 percent 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.

A five-year variable rate mortgage at 2.5 percent allows a borrower to lower the early cost of a loan, compared with a five-year fixed rate at 3.5 or 4 percent. 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.”

Read more @ http://ca.reuters.com/

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