Monday, April 13, 2009


First-quarter Canadian mortgage rates continued to decline in 2009 to the benefit of consumers. The posted one-year borrowing cost on a fixed term mortgage fell to 5.00 per cent at the end of February, marking a 195 basis points (bps) decline since July 2008. The five-year fixed term mortgage rate fell to 5.79 per cent in February, down 141 bps from October 2008 (Fig.1). BCREA forecasts near-record low mortgage rates in the next four quarters, as weak economic conditions and low inflation contribute to lower interest rates in Canada.

On March 3, the Bank of Canada (BoC) cut its target for its key overnight interest rate by 50 bps to 0.5 per cent as the global economy worsened and domestic demand pulled back. On a cumulative basis, the target overnight rate has been cut by 400 bps since December 2007. Despite the current low level, futures markets are pricing in a further 25 bps cut. The BoC noted in its March 3 communiqué that “the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up.” Given the continued deterioration in global economic conditions, particularly in the US, BCREA expects the BoC to lower the overnight rate to a floor of 0.25 per cent on April 21.

A decline in short-term interest rates and minimal risk of inflation in the near future should set the stage for further downward pressure on mortgage rates. Variable mortgage rates, which generally move in lock-step with the prime and hence the overnight rate, should reach a bottom after the BoC’s next interest rate announcement on April 21, notwithstanding rate discounts or premiums offered by financial institutions.

Fixed term mortgage rates, which are closely related to bond yields and deposit rates of similar maturity, should decline as the inflationary risks associated with higher potential interest rates in the future subside with the weakened economy. Meanwhile, tight credit market conditions are expected to improve, albeit slowly, lowering the cost of mortgage market funds raised in capital markets. The potential for an improvement in economic conditions in 2010 will lead to modest growth in interest and mortgage rates during the second half of 2010.

“Copyright British Columbia Real Estate Association. Reprinted with permission.”

Global Economy Retrenches

The global economic outlook has deteriorated rapidly during the last two quarters. The ongoing financial crisis has bled into the real economy as declines in asset values have cut into household wealth, yielding lower consumer demand. Consumers and businesses have also cut back or postponed expenditures and production amid the economic uncertainty, lowering consumption
and capital expenditures.

These worsening conditions led the International Monetary Fund to lower its global growth forecast in late January to 0.5 per cent for 2009, with a 3 per cent rebound in 2010. In a more recent release, The World Bank forecasted a contraction in the global economy for 2009. Both 2009 forecasts underscore the severity of the current situation, which would mark the worst
global performance since World War II.

“Copyright British Columbia Real Estate Association. Reprinted with permission.”

Canada Caught in the Undertow

As a small open economy, Canada is not immune to the global recession. The deep contraction in US economic activity has been particularly challenging for Canada, given the countries’ trade ties. US auto sales dropped to an annualized rate of 9.1 million units in February, marking a 40 per cent year-over-year decline and the lowest activity on record. This contributed to declines of 30 per cent in the vehicle manufacturing components of Canada’s GDP in Q4 2008. Meanwhile, the US housing market has yet to turn the corner. New home starts have tumbled to historical lows while home prices continue to trend lower, suggesting further challenges for Canada’s wood products sector. A global pull-back in economic activity has also lowered the demand and price of a number of other Canadian export commodities, including those in the metals, minerals and energy sectors.

While the retrenchment in export activity has dominated headlines, domestic demand has also weakened. Personal spending fell for the first time since 1995 in Q4 2008, reflecting lower consumer confidence and less robust labour market conditions. Investment has also slowed in plant and equipment, and residential structures. The latter reflects less new home construction, renovations, and real estate transfers.

As a result, Canada’s GDP contracted at an annualized rate of 3.4 per cent in Q4 2008, the weakest quarterly performance since 1991 (Fig.2). That said, this decline paled in comparison to those recorded in regions such as the US, Euro Area and Japan.

A weaker Canadian dollar has and will result in higher import prices. Even so, a contracting economy with excess capacity will continue to exert downward pressure on inflation (Fig.3). This will provide the Bank of Canada room to further cut its policy interest rate to spur economic activity. Expectations of lower inflation and future interest rates will push interest rates lower on longer-term products, such as mortgages.

“Copyright British Columbia Real Estate Association. Reprinted with permission.”

New Survey on Affordability and Green Housing Reveals BC Trends

Vancouver, BC – April 7, 2009. A survey of homeowners and renters across British Columbia suggests that, when it comes to housing, affordability concerns and making smart green choices are top of mind for most BC residents.

Sponsored by the British Columbia Real Estate Association (BCREA), the January 2009 Mustel Group survey examines the top affordability barriers in the province and how provincial taxes and homeowner assistance programs impact BC buyers.

A total of 38 per cent of British Columbians plan or hope to purchase a property within the next five years, with about half of these potential buyers expecting to do so in the next two years.

“Following the May 12 election, quick actions by the newly elected provincial government on key issues of interest to the real estate sector may assist these buyers in their home buying decisions, while also potentially empowering those who are currently unable to purchase a home,” says BCREA President Scott Veitch.

Survey findings indicate that availability of affordable properties is the key barrier in a home purchasing decision. Other major financial barriers include employment security, ability to qualify for a mortgage and the provincial Property Transfer Tax.

“We’ve never reached out to the public quite like this before,” notes Veitch. “This survey helped create a clearer picture of the key issues facing homeowners, renters, buyers and sellers in this province. When the new government is formed, the information in this survey will help uask for changes that make home ownership

The survey findings also provide information on the green choices BC residents are making at home and the data suggests that about three out of every four British Columbians have already taken steps to make their homes more environmentally friendly.

Water conservation, home energy assessments and general awareness of federal and provincial green programs are also addressed by the findings.

“Copyright British Columbia Real Estate Association. Reprinted with permission.”

Housing Starts Move up in March

The seasonally adjusted annual rate1 of housing starts increased to 154,700 units in March from 136,100 units in February, according to Canada Mortgage and Housing Corporation (CMHC).

“Higher multiple starts in Ontario and Quebec were the main contributors to the rise in new construction activity in March,” said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. “While the multiples segment experienced the largest increase, the overall boost in starts was broad based, encompassing the singles segment as well.”

The seasonally adjusted annual rate of urban starts increased 17 per cent to 127,900 units in March. Urban multiple starts increased 28.3 per cent to 81,500 units, while urban single starts moved up by 1.3 per cent to 46,400 units in March.

March’s seasonally adjusted annual rate of urban starts increased by 35 per cent in Ontario and by 23.3 per cent in Quebec. Urban starts declined by 17.3 per cent in British Columbia, by 7.9 per cent in Atlantic Canada, and by 7.5 per cent in the Prairies.

Rural starts were estimated at a seasonally adjusted annual rate of 26,800 units in March2.

New home construction is now at a more sustainable level after having been exceptionally strong over the past 7 years, exceeding 200,000 units per year.

CMHC OTTAWA, April 8, 2009