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Canadian Mortgage Market Rests in Delicate Balance (Part 2)

6/25/2014

Low interest rates stimulate home purchase, mortgage debt reduction, optimism

Canadians are reducing their mortgages by negotiating lower interest rates, making lump sum pre-payments and repaying their mortgages at, on average, two-thirds of their contracted amortization periods. This has created an attractive landscape for new homeowners, as historically low interest rates have attracted increasing numbers of first-time buyers, who made up fifty-five per cent of new homes purchased in 2013.

In the survey, Canadians express a strong belief that “real estate in Canada is a good long term investment” and agree that mortgages are a form of “good debt.” Canadians still feel optimistic about the economy in the coming 12 months, and say they have no regrets taking on the size of mortgage they did.

Economic storm clouds
Even as the housing market appears buoyant, new housing starts have dropped, a slowdown that is just getting started, raising warning flags over bigger negative impacts to come.

“Across Canada the housing market is slowing, and has been on a downward swing since the mortgage policy change in 2012,” said Will Dunning, CAAMP Chief Economist. “While the national market may look healthy, activity in the Greater Toronto Area (including Hamilton), the Greater Vancouver Regional District and the Calgary area is skewing the numbers high. In the rest of Canada sales activity has weakened and house prices are flat, and even falling in some communities. Housing has played a key role in driving economic growth and job creation in Canada. But looking ahead, decreased starts and slower price growth will throw off the balance between the housing market and the overall economy.”

The Report urges policy makers not to confuse rising home prices in the Greater Toronto Area (including Hamilton) and the Greater Vancouver Regional District where urban land shortages are driving prices, and the Calgary area, which currently benefits from strong job creation, with the slowdown which is evident in other communities across the country.

The strongest indicator is housing starts. The Report says new urban low rise housing starts have dropped by around 15 per cent and it is expected that apartment starts will also soon follow. The overall impact is that starts will have dropped by 20 per cent by late next year, compared to 2011 and 2012 levels.

This matters because the housing market is closely tied to the economy, generating jobs in construction, manufacturing, financial services and more. Each new single family home built in Canada creates 2 to 2.5 “person years” of employment, so a slowdown in starts will inevitably result in fewer jobs.

In addition, a slowdown in the housing market dampens consumer confidence, which is typically boosted by house prices. Declining consumer confidence leads to a decrease in spending, which will negatively impact the broader economy.

For a full copy of CAAMP’s spring survey report, visit www.caamp.org.

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