Wednesday, 23 October 2013

G&M: Bank of Canada warns of risk of housing ‘correction’

The Bank of Canada is warning about the risk of a housing “correction” given the latest strength of the market.
While it believes Canadians are cutting back on their thirst for borrowing, and that all will be fine in the end, it nonetheless cites the risk of a bubble and the fallout on the broader economy.
“The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy,” the central bank said today.
“The continued slowing in household credit growth and the rise in mortgage interest rates point to a gradual unwinding of household imbalances,” it added in its monetary policy report.
“However, recent data suggest some risk of renewed momentum in the housing market. This would provide a temporary boost to economic activity, but could exacerbate existing imbalances and therefore increase the probability of a correction later on.”

 - The "demand brought forward" caused by low rate-holds from June/July (expiring between late September and late November) was very likely the cause of the "renewed momentum".

- Despite the dropping Canada 5Y bond yield since the (temporary resolution of) US debt limit/government shut-down fiasco and today's cut-back of Canadian economic forecast, the current 5Y CDN Bond Yield is still 1.73%, while back in April the yield was at 1.18%.

- We will likely see further lowering of fixed mortgage rates (currently at 3.79%-3.89%), but we likely won't see the 5Y Fixed rate go back to April's historically low 2.69%-2.79%

- I will not be surprised to see Flaherty/OSFI dish out more mortgage tightening rules if RE's momentum persists prior to the Spring market.

- Though I still expect noticeable (worse than seasonal) softening of Vancouver RE (vs summer/13) for the remainder of this year.

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