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Canadian Housing: Correction Coming?


Viking
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The Bank of Canada today in its statement has indicated that rates will likely be going up with the first increase in June (from 0.25% to ???).

 

The past few years, the housing market in Canada had followed a similar path to that in the US (up lots and then down fast). But then last year the US market kept going down and the Canadian market (as rates went crazy low) went crazy again. Today house prices in Canada are back at peak levels.

 

The government of Canada 5 year bond today is at 3.21% (up 14 basis points); a couple of weeks ago this same bond was at the 2.5% level. Most banks have taken their 5 year fixed rate up 100 basis points in the past few weeks (from about 3.6% to 4.6%). More importantly, todays announcement from the bank of Canada likely means that we have seen the bottom in mortgage rates and rates will be moving higher. Inflation today is slightly over their target level... should inflation actually go higher the bond market (and mortgage rates) may get ugly.

 

Given how insanely high real estate prices are once again, given that personal incomes are not increasing, given the new (more stringent) mortgage rules for first time buyers, given the number of new listings currently hitting the market and now given the high likelihood of still higher mortgage rates it looks to me that the bull market in Canadian real estate is now running on borrowed time.

 

My previous outlook was for prices to go sideways for an extended period. With interest rates increasing materially only a price correction makes any sense to me now (but not starting until August as the 120 day preapprovals will likely keep things frothy in the short term).

 

It does boggle my mind at the amount of debt home buyers are taking on in the Greater Vancouver area today. Materially rising interest rates are a game changer...

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The demand side of the equation in Vancouver clearly is about to get worse at least as far as the Cdn. resident purchaser is concerned. A significant source of demand however in Vancouver has been the offshore mkt. the dynamics of this source of demand is frankly a mystery to me. The supply side of the equation however is also severly constrained and not about to change in the next 18 months in any meaningful way. ALL new construction ceased the day Lehman failed in the Vancouver mkt, the banks just turned off the credit taps for builders developers. If you had not poured the foundations you were told to stop activities. The city of Vancouver cancelled the last 14 meetings of the rezoning sub-comiitee because of a lack of proposals , the only meaningfull supply for the next 18 months will be from exisiting housing stock. The rest of the country however I really can not comment on.

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