Regardless of what are being reported in recent media and institutional publications – there are only two factors which governs the housing show – Demand and Supply. the value of your nest is influenced by buyers – who are willing to pay the amount you are asking for.
There are many sub-factors underpinning those two main forces of economy – one of them is interest rate. Not all of us have a mortgage on our home. Actually about 40% Canadian Homeowners1 does not have a mortgage on their homes. Those 40% homeowners may have some other kind of loans but not a mortgage. A little over 70% of Canadian2 holds some kind of debt.
Another interesting fact is that among those who has a mortgage only half of them has less than 50% equity in their home.
Debt is everywhere. We always own something to someone. It is okay to have a debt as long as it is not money. When we have monitory debt then it is a different as financial debt has a risk – no matter how small it is. The burdon of the risk associated with a debt is mainly on the lender. Bigger the sum bigger the risk. As we know – higher income segment of the borrowers have higher loan and therefore pose higher risk to the lenders.
It is a fact that the mortgagee covers the most of the pie-chart but the non-mortgagees are not insignificant either. They would also pose a significant threat to the system if the rates go up. It is also not right to treat all the high ratio mortgagees with the same bias.
Housing price is governed by various factors. Some of them are;
- (Demand Parameter) Population Growth: Predictions are that Canadian population will continue growing next year.
- (Demand Parameter) Employment: It will also expected to grow in 2012 and continue to grow in 2013.
- (Demand Parameter) Personal Income: Similar story here.
- (Supply Parameter) Housing Start: It is predicted to moderate in 2013.
- (Supply Parameter) Housing Completions: It will take longer for the builders to build and there will be fewer homes being completed this year than last year.
- (Supply Parameter) Housing Price: Prices are not really growing if you take inflation into consideration. This may keep some sellers in the sideline.
- (BOC / Political Parameter) Mortgage Interest Rate: This is not going to go up anytime soon.
None of those above factors are indicating a serious downturn in the housing market. Low interest rates can only do so much in a saturated market. Mortgage rate is a political parameter because the government has the control of the printing press. In a country where more than two third of the eligible voters have debt – raising interest rate can be very un-popular.
An indirect indicator of housing demand is the Rental Vacancy Rate. Number of rental units available in the market went down compared to last year. Number of new immigrants and better job market are the main two contributors in that movement.3
Driven by high house price – Canadian Net-Worth is rising. Canadians are taking debt management more seriously. Canadian Household Credit market Growth has slowed significantly and mortgage lending is also facing a slower than usual market.4
Then where is the trouble? Well, the lenders are in trouble. With serious competition, over-saturated market and low yield all those factors drove the banks towards the edge. If your house price goes down or up by 2% – you would not really feel much. As an example, RBC has about 170 billion5 in mortgage lending. One per-cent of it means 1.7 billion – more than its quarterly earnings. The lenders are facing this harsh reality now.
Stats Can data4 showed that the corporate debt to equity ratio is moving down. That is mainly due to higher income. Businesses are getting a huge help from the low-interest rate environment. They can borrow cheap and invest in the business. Raising rate too fast would hurt the economy.
As CMHC has predicted7 correctly that GTA market will continue to grow in 2012 – it will be applicable for many parts in Canada – if the indicators are correct. CMHC in another report9 resonated the same tune as RBC8which is predicting a moderation in the market but stopped short of defining “Moderation“. Similarly Scotia also predicted a cooler housing market in Canada – eventually it failed to define the temperature.
Probably the lenders are in an over-alert situation as a lot depends on the health of the housing market. Only future knows what it has in store for us but now we are doing great.