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The Canadian Housing amidst the Dropping Oil Prices!

In the wake of the plummeting oil prices, the bond marketing is suggesting an overheated Canadian housing market that is about to get hotter in the coming spring!

bank of canadaThe Bank of Canada’s unexpected cut in interest rates to 0.75% after a shocking oil price plunge that may result in economic growth which is not expected at the current time.  (Financial Post, Economy).  The rate, which influences various lending rates across the economy, had been at 1% since September 2010, and was last cut in April 2009.“The oil price shock increases both downside risks to the inflation profile and financial stability risks,” said the central bank.   The cut is “intended to provide insurance against these risks” and support the adjustments needed to return the economy to full output. (Poloz, Bank of Canada Governor) On the brighter side, the central bank said the lower oil price will boost global growth, in particular in the U.S., Canada’s largest trading partner. That should raise Canada’s 2016 growth rate to 2.4%, higher than the October forecast of 2.3%.According to policymakers, the negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the bank’s monetary policy response.  Lower incomes will also hurt government revenue, and the finances of consumers that are already carrying record debt loads after a housing boom, the bank said. The imbalances in household finances will “edge up in the near term” with energy-rich regions most at risk as the job market weakens stated the Central Bank.Home sales in Calgary, the nation’s oil hub, plummeted 24.6% in December from the previous month. (Canadian Real Estate Association).

Interest Rates and Housing Market

The average five-year mortgage rate in Canada is a record-low 4.79%, according to central-bank data. Lower rates can be obtained from banks and other private lenders. (Financial Post, Mortgage and Real Estate).  The rate cut could boost sales and prices of homes in Central and Atlantic Canada, including in Toronto’s red-hot property market.  TD economist Craig Alexander says lower interest rates could spur consumers in non-oil dependent provinces such as Ontario to take on more debt, which in turn will boost the region’s real estate market.

On the flip side, research shows an estimated 30% to 40% of Canadian households are taking advantage of low interest rates to pay back their mortgages to shorten their amortization, reducing the risk of an interest-rate shock.   “If we borrow more, that will add to the ultimate adjustment,” states Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce.  (Financial Post, Mortgage and Real Estate) “But that depends on what we do. We have seen in the past that Canadians use low interest rates to actually pay down debt faster, as opposed to add to their debt. If that’s what we do, it’s a good thing.”

Housing prices have continued to gain across the country, particularly in the largest cities. In Vancouver, the average home price jumped 27% since December 2008, according to the Canadian Real Estate Association. Toronto home prices rallied 49% in the same period to $521,300 in December 2014.

This year, there’s no guarantee the banks will respond to the lower rates in the bond market by lowering mortgage rates, and even if they do, there’s no guarantee cheaper mortgages will further inflate housing values.

 

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