Bank of Canada cuts interest rates again

The Bank of Canada lowered its benchmark overnight lending rate by one quarter of a percentage point to 2.25 per cent at its setting on October 21st. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to 2.5 per cent.

The Bank also lowered its policy interest rate by half a percentage point on October 8th, as part of a coordinated cut in interest rates with other central banks. Combined with the interest rate cut on October 21st, the Bank has cut its overnight lending rate by three quarters of a percentage point since it last met to set its policy interest rate on September 3rd.

The Bank’s decision to cut interest rates aims to support Canadian economic growth. The Bank recognized the impact that the global credit crunch is having on global economic growth, indicating “the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession.”

“Slowing global economic growth continues to reduce demand and prices for energy and other commodities,“ said CREA Chief Economist Gregory Klump. “The Bank now expects core inflation to remain below its target of two per cent until the end of 2010, so it can further cut interest rates without worrying about causing inflation to spiral upward.”

To stabilize credit markets in the aftermath of the U.S. sub-prime mortgage market meltdown, the Bank has cut the overnight lending rate by 2.25 percentage points from December 2007 to October 2008.

The Bank reduced its forecast for Canadian economic growth. When announcing further interest rate cuts, it said, “The Bank expects growth to be sluggish through the first quarter of next year, then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010 supported by improving credit conditions, the lagged effects of monetary policy actions and stronger global growth. The recent sizeable depreciation of the Canadian dollar will also provide an important offset to the effects of weaker global demand and lower commodity prices. Overall, the Bank projects average annual growth in real GDP of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.”

The Bank had earlier revised its forecast for economic growth downward in its July Monetary Policy Report. Remarks in its October announcement to cut interest rates suggest that it will likely cut interest rates further when it meets to set its policy interest rate on December 9th.

When the Bank cut interest rates on October 21st, the advertised conventional five-year conventional mortgage rate stood at 7.2 per cent. This is virtually unchanged from where it stood a year ago, and 0.35 per cent above where it stood when the Bank made its previous interest rate announcement on September 3rd. Competition among mortgage lenders remains stiff, but discounts off advertised mortgage interest rates remain small and in some cases have been eliminated due to the U.S. subprime mortgage meltdown and resulting global credit crunch. These continue to elevate banks’ cost of funds.

“National resale housing sales activity continues to ease from its peak last year,” said Klump. “Buyers are taking more time to shop. Unlike the U.S., Canadian homeowners are by and large under no pressure to sell, so many unsold listings are being taken off the market. New listings are coming off their peak, which is stabilizing the Canadian resale housing market.” (CREA 21/10/2008)

Canada’s MLS® housing market balance stabilizes in third quarter

The number of properties listed via the MLS® systems of Canada’s major markets was down from its peak in the third quarter of 2008, according to statistics released by The Canadian Real Estate Association (CREA). This caused the balance of sales-to-new-listings in the market for resale homes to tighten on a quarter-over-quarter basis for the first time since the beginning of 2007.

New MLS® residential listings in Canada’s major markets numbered 146,637 units on a seasonally adjusted basis in the third quarter of 2008. This is 3.3 per cent below the highest level on record, set the previous quarter. New listings eased most in Edmonton and Calgary in the third quarter, followed by declines in Vancouver and Montreal.

The balance between sales and new listings has stabilized in many major resale housing markets in recent months. The trend stands out most in Edmonton and Calgary, where a sharp drop in new listings and rising sales activity has firmed up the resale housing market considerably since the beginning of the year.

“Informed buyers and informed sellers look at the facts. And the facts right now indicate the real estate resale market is stabilizing in many markets,” says Calvin Lindberg, the President of The Canadian Real Estate Association.

“There have also been a number of initiatives that will have an impact going forward, including the government’s decision to invest $25 billion in insured mortgage pools, the recent drop in the Bank of Canada rate, and the new rules reducing the maximum amortization to 35 years instead of 40,” the CREA President adds. Those new mortgage rules go into effect October 15th. “The third quarter MLS® statistics and these developments are more factors showing the Canadian market is not following U.S. housing trends.”

Seasonally adjusted MLS® residential home sales in Canada’s major markets edged 1.5 per cent lower on a quarter-over-quarter basis to 76,391 units in the third quarter of 2008. The small decline in activity reflected fewer sales in Vancouver, which more than offset a rebound in activity in Edmonton and Calgary.

Seasonally adjusted transactions rose on a month-over-month basis in the majority of major markets in September 2008. Some 25,680 homes traded hand via the MLS® systems of Canada’s major markets on a seasonally adjusted basis in September, an increase of three per cent from levels recorded in August. The increase may reflect an influx of buyers prior to the elimination of mortgage insurance availability for those with less than a five per cent down payment.

Unadjusted (actual) sales activity was on par with September of last year, but remains below levels one year ago in some of the Canada’s most expensive housing markets. Lower sales activity in higher priced markets pulled the overall major market MLS® residential average price down by 6.2 per cent year-over-year in September, despite year-over-year average price gains in 17 of 25 major markets.

Lower activity in some of Canada’s pricier markets has weighed on the overall average price trend this year due to a decline in their weight in the average price calculation compared to last year. The price trend is similar but less dramatic for the weighted average price, in which the proportion of privately owned housing stock in each market is taken into account.

“Price declines in some of Canada’s more expensive housing markets will outweigh further price gains in other markets and continue pulling the national average price lower over the rest of the year and into 2009,” said CREA Chief Economist Gregory Klump. “Global financial market turmoil and the resulting slowdown in global economic growth will continue weighing on Canadian exports and economic growth.”
“As the Canadian housing market and pricing environment cools, the number of days on market for sales is likely to rise. By and large, Canadian home sellers are under no financial duress to sell, and a number may decide to take their home off the market should it remain unsold when the listing expires. The resulting decline in listings limits the extent to which the balance of sales and new listings will realign. Canadian homebuyers should not expect to see the kind of price correction that’s underway in the U.S., where overly indebted homeowners are selling into a housing market where foreclosures and the number of newly constructed unoccupied homes are increasing. (CREA 15/10/08)

Risks are Contained Within the Canadian Mortgage Market

In recent weeks, a great deal of attention has been given to the health of the Canadian mortgage market in relation to events south of the border. The recent action by Congress in Washington has heightened scrutiny on the Canadian mortgage and real estate markets.

Numerous studies have been released regarding Canada's economic situation and there is no doubt that both the real estate and mortgage markets are slowing in Canada.

CAAMP's chief economist Will Dunning has prepared a report that provides a timely review of the market and key indicators that separate Canada from the U.S. Here is a copy of the report.

By CAAMP Chief Economist, Will Dunning

Recent media reports have expressed some concerns about potential risks for the Canadian housing and mortgage markets. One of the concerns being expressed is that Canadian consumers have been “over-extending” themselves through mortgage borrowing. And, it has recently been suggested that the Canadian housing and mortgage markets might fall into a downward spiral like the one currently underway in the United States.

Most Canadian economists, including CAAMP’s Chief Economist, point to very substantial differences between the Canadian and US situations, which mean that the risks in Canada are considerably lower than they have been in the US.

The Canadian Economy is Much Stronger.

During this decade the Canadian economy has been much stronger than the US economy. Figure 1 shows the percentages of adults that are employed (the “employment-to-population ratio”). The US economy peaked at the start of the decade. While it recovered somewhat during 2005 and 2006, the ratio has remained well below the prior peak. By contrast, the Canadian economy has shown increasing strength in this decade, and the employment-to-population ratio has set new record highs every year from 2003 to 2008. Moreover, to the extent that the US economy did improve at middecade, most of the growth was from the housing market – increased construction plus home equity take-out. There was a self-reinforcing bubble in the housing market. In Canada, on the other hand, economic growth has been diversified and much more durable. The Canadian economy has done a very good job of generating highly-qualified home buyers; in the US, slower job creation has meant
that there have been fewer good mortgage candidates. Credit quality has remained very strong in Canada but slipped badly in the US.



Housing Equity is Substantial in Canada

Some very interesting estimates from Scotiabank’s Economics Department (see Figure 2) show that Canadians have retained strong equity positions in their homes. Scotiabank estimates that in Canada, home equity is equal to almost 70% of the values of residential property – in other words, total mortgage debt is only about 30% of the total value of Canadian homes, and the equity position today (almost 70%) is stronger than it was a decade ago (about 66%). In the US, on the other hand, there has been sharp erosion of home equity, which began during 2001/02. By 2004 – well before the onset of the current US troubles - the equity position had already seriously eroded.

Figure 2 Low Debt Service Ratios in Canada


Most Canadian home owners have housing costs that are very well within their comfort zones. Data from 2006 (shown in the table below) indicates that more than 90% of Canadian home owners have GDS ratios below the traditional 32% threshold.



Canadian Home Owners by GDS Ratios, 2006
GDS Ratio Number of Home Owners As % of Total

<20% 5,709,000 70.9%
20-21.9% 417,000 5.2%
22-23.9% 306,000 3.8%
24-25.9% 304,000 3.8%
26-27.9% 225,000 2.8%
28-29.9% 181,000 2.3%
30-31.9% 139,000 1.7%
32-34.9% 145,000 1.8%
35-39.9% 166,000 2.1%
>=40% 455,000 5.7%

Total 8,048,000 100.0%
Source: Adapted from Statistics Canada, Survey of Household Spending PUMF, 2006.
Cat. No. 62M0004XCB

Scotiabank has estimated that consumers’ total debt service burden in Canada (as a percentage of after-tax income) has not worsened during the past decade, with the burden staying close to 8%. In the US, by contrast, the debt service burden is almost twice as high (about 14%) and the burden has increased significantly, from about 12% a decade ago.

Very Few Canadians are in Arrears

The most recent data from the Canadian Bankers Association – which covers 7 major banks – shows that just 0.27% of residential mortgages were in arrears (three months or more, as of June 2008). This amounts to about 10,300 out of 3.85 million mortgages. This data from the Canadian Bankers Association covers about 85% of all residential mortgages in Canada - it is possible that there is a different rate of arrears in mortgages from other lenders. The Bank of Canada estimates that about
2% of sub-prime mortgages in Canada may be in arrears or foreclosure. In total, 20,000 to 25,000 Canadian home owners might be in arrears, a very small fraction of the 8.05 million home owners in Canada.

Interest Rates Contribute to Sustained Affordability

One of the major risks faced by mortgage borrowers – a factor that has clearly contributed to the US crisis - is that their monthly mortgage payment might increase when their mortgage comes up for renewal. Interest rates for 5-year fixed rate mortgages (after lender discounts) are currently 5.25% to 5.5%, almost identical to the average for the past five years (5.2%). For variable rate mortgages, typical discounted rates are now 4.25% to 4.5%, similar to the average of the past 5 years (4.3%). For most Canadian home owners, future renewals will not result in increased mortgage payments. What’s more, most Canadian households have experienced income growth since they took out their mortgages, with the consequence that over time their ability to cover their mortgage payments has improved.

In many respects the Canadian and US housing markets have followed similar paths during the past decade – until late 2006 (see Figure 3). In both countries strong demand resulted in rapid growth in property values. In the US, however, a strong growth cycle turned into a bubble, and like all bubbles, it eventually burst.



The key reason that the Canadian housing market did not follow the US into the same quagmire is that our lending industry and practices are structured differently:

• In particular, most Canadian mortgages remain on the lenders’ books, and there is strong incentive to maintain high credit standards. As is shown in Figure 4, only about 6% of Canadian mortgages are held by special purpose corporations and non-depositary intermediaries.

• In the US, on the other hand, widespread securitization eventually caused a breakdown in the incentive to control risk. When it became apparent that mortgage originators would not have ultimate accountability for credit quality, credit quality was abandoned.



Will Dunning is the Chief Economist for CAAMP and President of Will Dunning Inc., a consulting firm that specializes in economic analysis.

Statistics Released by the Calgary Real Estate Board

Calgary, October 1, 2008 – The buyer’s market trend continues, according to figures released by the Calgary Real Estate Board (CREB®).

In a news release issued yesterday, by the Canadian Real Estate Association (CREA), President, Calvin Lindberg said, “We must remember that all markets go through cycles and remember that the national housing market is actually made up of different communities. Real estate markets are local and every community, and every area, is different in terms of trends and pricing.”

CREB® President Ed Jensen concurred with Lindberg, saying, “We can see these cyclical affects in our own local Calgary market. Some communities in our city are stabilizing, while others are in the midst of a market shift.”

Single family Calgary metro new listings added for the month of September totaled 2,631, a decrease of 15.3 per cent from September 2007, when new listing added totaled 3,106 and an increase of 15.9 per cent from last month, when new listings coming to the market were 2,270. Calgary metro condominium new listings added in September 2008 were 1,186, showing a decrease of 9.8 per cent from the 1,315 new condominium listings added in September 2007 and a decrease of 12.5 per cent from last month’s condominium listings of 1,054. Single family Calgary metro sales for the month of September came in at 1,152, showing an increase of 8.3 per cent from the 1,064 sales in September 2007 and showing a decrease of 1.5 per cent from last month’s sales of 1,170. Condominium sales for the month of September were 465, a decrease of 3.7 per cent from the 483 condominium sales recorded in September 2007 and showing a decrease of 6.1 per cent from August 2008 when 495 condominiums changed hands.

“The number of single family homes selling in the $200,000 to $250,000 price range has increased this month by 50 per cent over last year. And while single family homes selling within the $350,000 to $450,000 price range have remained almost the same as they were in September 2007, another significant change is the price range of 450,000 to 550,000, seeing a 19 per cent decrease in the number of units sold,” explained CREB® President, Ed Jensen. “In short, more homes are selling in the lower price ranges, indicating that the favourable price range has shifted to one lower than that of 2007. Clearly, it’s still a buyer’s market and the opportunity for first time home buyers, to get into the market, is better than it’s ever been,” Jensen concluded.

The median price of a single family Calgary metro home in September 2008 was $395,000, showing a decrease of 6.1 per cent from September 2007, when the median price was $420,500 and down 0.8 per cent from last month when the median price was $398,000. All Calgary Metro MLS® statistics include properties listed and sold only within Calgary’s City limits. The median price is the price that is midway between the least expensive and most expensive home sold in an area during a given period of time. During that time, half the buyers bought homes that cost more than the median price and half bought homes for less than the median price.

The average price of a single family Calgary metro home in September 2008 was $444,048, showing a decrease of 5.7 per cent from September 2007, when the average price was $470,888. The average price of a Calgary metro condominium was $287,426, showing a 10.6 per cent decrease from September 2007 when the average price was $321,614. Average price information can be useful in establishing trends over time, but does not indicate actual prices in centres comprised of widely divergent neighbourhoods or account for price differentials between geographical areas.

The Calgary Real Estate Board is a professional body of 5,692 licensed brokers and registered associates, representing 262 Member offices. The Board does not generate statistics or analysis of any individual member or company’s market share.