Spring
selling season should be a good one
By Dr. Peter Andersen
The preconditions are in place for another good spring selling season. While
new and existing home sales are expected to edge lower from last year's record-setting
pace, 2005 will probably still rank as one of the best in the past 10 years.
Housing affordability has remained basically intact, despite rising house
prices. Affordability calculations indicate that housing costs relative to
household income remain close to and even below their average over the past
20 years.
Posted rates for one- and five-year mortgages are at 4.80 and 6.05 per cent
respectively, and this means effective rates in the 4.00 to 5.00 per cent
range after factoring in lender discounts. A one-year variable rate mortgage
can still be negotiated for 3.50 per cent. Better still, the Bank of Canada
is now expected to keep interest rates unchanged this spring, providing the
kind of interest rate stability that has always in the past provided a major
support to housing demand.
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"The
Bank is now expected to keep rates unchanged through the spring."
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Stable
Interest Rates
After repeatedly warning that interest rates would have to rise, the Bank
of Canada has changed its mind, at least for now. An abrupt chill has descended
on the Canadian manufacturing sector as a result of the delayed impact of
the soaring Canadian dollar and the Bank of Canada is worried.
Both new and unfilled orders have been declining. The Bank is now expected
to keep rates unchanged through the spring. There is even the possibility
of rate cuts if the Canadian dollar is propelled higher by a general decline
in the U.S. dollar against all currencies. In fact, the probability of rate
cuts actually seems greater than the possibility that the Bank might soon
decide to start raising them again.
Economic effects from
strong dollar
Bank of Canada officials carried out an in-depth survey of about 100 businesses
between mid-November and mid-December in an attempt to gauge the impact of
the Canadian dollar on operations. About 55 per cent of the companies now
report being adversely affected by higher dollar, up from 45 per cent in the
autumn 2004 survey.
Good news for home
builders
Some businesses, however, benefit from a strong Canadian dollar and new home
builders and renovators are part of this group. The benefits flow from two
sources. First, currency appreciation is a substitute for monetary tightening.
As a result, there is a distinct possibility that some offset will be required
in the form of lower interest rates.
Second, the firms benefiting from a higher dollar are mainly doing so as a
result of lower input costs. The category "building and outdoor home
supplies" outperformed all other retail groups in 2004 with a nominal
sales increase of approximately 10 per cent and, at the same time, enjoyed
a substantial reduction in the costs of imported inputs. New home builders
stand to benefit in a major way from lower costs for imported building materials,
supplies, equipment and fixtures.
Debt
fears are unfounded
The average Canadian is not feeling financial stress. The debt service ratio
is the lowest in almost 25 years. Even if short-term interest rates were to
increase by 400 basis points, the debt service ratio would only return to
its 1980-2004 average.
Also, much of this debt has been used to acquire assets. The household debt-to-asset
ratio is comfortably in line with its 15-year average. Mortgage debt accounts
for almost 70 per cent of total household debt and real estate asset values,
according to the Bank of Canada, "seem to be supported by strong fundamentals."
Canadians are actually in good financial health and are successfully managing
debt levels relative to assets.
House prices not extreme
The Bank of Canada's December Financial System Review concluded that house
prices in Canada are not out of line with their fundamental value. The accommodation
ratio, which measures the relative cost of renting compared to owning, has
been declining but is still near its historical average. Also, the general
downward trend in the number of unoccupied dwellings suggests that home purchases
have been made for occupancy purposes rather than for speculative investment.
Finally, the increase in house prices in Canada has been much more subdued
than in other countries. The strong increase in supply over the past year
has actually produced a moderation in new house price increases since mid-2004.
Expect
215,000 starts in 2005
Housing starts reached a 17-year high of 233,000 units last year - an increase
of 6.7 per cent from the year before. This was far in excess of what had been
expected. This time a year ago forecasts for 2004 were around 200,000 units.
Contrary to expectations, interest rates remained at historical lows and employment
growth was more than twice what had been expected. Single starts rose by 3.6
per cent in urban areas and multiple unit starts increased by 9.7 per cent.
Year-end strength in building permits, a leading indicator for starts, points
to a sustained high level of starts in early 2005. Permits for multiple unit
construction increased by 22 per cent in November from the month before. Given
the change in the Bank of Canada's interest rate policy, we have raised our
2005 housing start forecast to 215,000 units. HB
