The lazy season is approaching fast and now I am watching the grasses to grow. Most of the clients have already closed the purchase of their homes, preparing to move and getting ready for the new school year. Parents are out with the kids enjoying summer and again I am watching the new infestations of dandelion.
From now till New Year the market usually stays low for us. If you follow Google trends then it tells the same story. This is also the time for en masse whinging and without a doubt it has begun.
I am not sure who or what started it but it appears that our new mortgage regulation is the easiest cause of the downturn, at least to complaint about.
The Reports, which started it:
Statistics Canada reported that total value of building permits fell by 2.5%. As an explanation it also said that the drop was due to decline in non-residential and residential sectors BC and AB.
Scotiabank said that;
Record prices combined with incremental regulatory tightening are reducing affordability and the housing market’s earlier momentum, notwithstanding the lowest borrowing costs on record.
Thus it put the onus of the housing market cooling on the regulation. The report did not stop there, it continued quoting;
Average Canadian home prices will eventually decline a cumulative 10 per cent over the next 2-3 years, as housing demand softens and buyers’ market conditions re-emerge for the first time in over a decade.
What a scary story; borrowers who borrowed with 5% down payment to buy that average home – will see their home worth less than the mortgage they owe – if they fail to cut down the mortgage principle amount fast enough.
In reality that can happen. People who get into an emotional bidding war while placing an offer on a home – may see this happen. For rest of the homeowners it is something they will never know before they sell their home.
What about inflation?
If the real inflation is about 3 to 3.5% then in three years your house price should at least go up by that amount. When you sell your home – three years from now and you get the same amount as your purchase price today – then there is a drop. Therefore, if Scotia report predicts the correct number then you should not see a drop in dollar amount in the sale price – two to three years from now.
In news, Bloomberg came up with a calculation saying that;
In Toronto – Condo sales dropped 10 percent in July from a year earlier and the average price fell 1 percent.
BOC wants to raise rate:
Mark Carney, in an interview to BBC said that Canada may consider raising interest rate in future. That is always a possibility but no one can predict when that will happen – with accuracy.
CMHC reports lower starts:
Today CMHC reported lower housing starts (compared to trend predictions) figure in Canada for the month of July. With the exceptions of few locations, overall urban starts went down and the major contributor was BC.
The overall picture:
- House prices may go down by 10%.
- Resale activity has gone down significantly.
- Interest rates may go up in future.
- Banks are asked to increase their cash stash – less lending.
- New housing construction has gone down in July.
- Canadian economic growth will slow.
The sign is clear that the housing market is going down and the government is not expected to intervene. So, probably it is not just a seasonal ranting, may be it is another bad dream coming true.