Canada Housing Crisis, Interest rates, and more!
Highlights:??
Housing Affordability:?
We have seen a sharp upward movement in The Government of Canada 5-year bond yield, which closed at a 16 year highest rate. Bond yield will impact an increase in the mortgage rate. As a result the cost of borrowing will go up too. It is expected that this may slow home prices and sales would take a dip too.?
On the other hand, a ceiling on home equity line of credit is expected to be enforced to safeguard against loan defaults. This will be targeted towards readvanceable mortgages.?
TD report predicts higher interest rates and an affordability crisis and The Canadian Real Estate Association is cutting its forecast for home sales activity for 2023 and 2024.?
Interest Rates, what Next??
Consistent interest rate hikes, a pause and one more hike in July. Now we are expecting another hike in September. A 25 basis point increase will burden the consumer, but hopefully cools down inflation. The Bank of Canada aims to bring the inflation down to under 3% by 2025. Having said that, the point to watch is international prices for crude and other commodities.?
Benjamin Tal , Chief Economist CIBC World Markets said, “We have to realize that we are already in a process of, in my opinion, overshooting – maybe by design by the Bank of Canada,” he said. “But it also means that if you overshoot, you accelerate the process of cutting.”
Until that time, Canadians keep feeling the warmth of repayment on their borrowings.?
Housing crisis is becoming more intense!
Expensive mortgages and qualification criteria, expensive construction raw material.. These are the major culprits impacting the housing market. Here is some interesting data from Urbanation Inc.
- In 2023, the first half of the year brought 6,727 in new condo sales.
- 59 per cent below the sales seen during the same period of 2022.
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- 42 per cent below the first half 10-year average of 11,516 units sold.
- Average price for available new condominiums decreased 1.3 per cent quarter-over-quarter and 2.2 per cent year-over-year to $1,411 per square foot.
Moreover, CREA believes that another interest rate hike will put the housing market in a doldrum.?
The Immigration Bubble:
Canada is expected to invite over 1.5 million new immigrants in the next couple of years. Whereas this is expected to offer opportunities, on the housing front, it will cause a major setback.?
Simply because there are not enough housing units to shelter these families, secondly rents are too high, putting pressure on newcomers who often do not earn as much to meet their cost of living in Canada.?
Ketki Saxena from ca.investing.com wrote:??
“A new report from Scotiabank's Derek Holt now posits that "the narrative that immigration is driving jobs and GDP is more hype based upon spurious correlations than substance",
In the report, Holt notes "The popular theory is that Canada’s jobs juggernaut has been driven by a surge of immigration over 2022–23."
"After all, population, employment, and GDP have all gone up and so therefore population’s large 1.05 million rise last year and this year’s ongoing gains must have driven the other two series in a cause-and-effect sense, right?"
Wrong.
In his analysis, Holt notes that the data, in fact, "suggests that the correlations are spurious in nature".
In my view, with such a high number of new immigrants in a short period of 2 years, initially it may likely create challenges for the new immigrants in finding employment opportunities. At the same time, the speed of delivering new housing units will continue to have an upward pressure on the cost of housing and living.
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