Housing Market Will Cool Off

Contrary to the views that the Canadian residential real estate market would remain buoyant for long, recently the Canadian central bank governor Mark Carney has warned that notwithstanding the current optimism over the housing market in the country, the consumers ought to be cautious of taking financial liabilities in excess of what they would be able to pay off since the good time would not continue for much long.

Carney told the House of Commons finance committee on Tuesday last that Canada's residential real estate market was not bridled in the manner in which the housing market was tanked in neighbouring United States during the just-ended global economic slump. On the contrary, the housing market in Canada recovered a little too quickly as soon as the economic sluggishness was over. The Bank of Canada governor predicted that the housing market in Canada will begin to turn cold during the next fiscal quarter and the situation will continue or stay at tepid planes for more than a few years from now.

According to the Canadian central bank governor, the forecast made by the bank for the period up to 2012 shows that there will be a noticeable decline in the housing market in the country from the second quarter of the current fiscal year and the trend will continue for quite some time ahead. At the same time, Carney said that the bank was concerned over the fact that a section of Canadians had taken on debts exceeding their limit and such consumers face a risk ahead. It may, however, be noted here that this was not the first time that Carney was making such remarks. In fact, it has been quite some time that the Bank of Canada governor has been cautioning regarding the unprecedented level of loans that are presently held by several Canadians for about a year now.

Latest available statistics show that on an average each Canadian family is indebted by $1.47 for each dollar of their disposable income (gross earnings of an individual from which direct taxes have been deducted). This figure is considered to be a record high even as the interest rates remain at a historically low level.

According to Carney, to a great extent, the recent surge in housing expenditure, including home renovations, is owing to the extremely low interest rates as well as the provisional home renovation tax credit introduced by the federal government. These two factors have not only been boosting the spending on housing, but also helped the home market to remain buoyant in Canada even during the recession, he added. At the same time, the Bank of Canada governor has asserted that it is not possible to maintain the current level of outlay on housing since the mortgage rates have already started going up.

Incidentally, while three major Canadian banks had announced raising their mortgage rates in April, now another three Canadian Banks have joined these financial institutions in hiking their mortgage rates. Separate announcements in this regard were made by these three banks - Scotiabank, Canadian Imperial Bank of Commerce and the Desjardins Group, on Tuesday last. Among these financial institutions, the Desjardins Groups runs two credit unions in Quebec and Ontario.

According the announcements made by these financial institutions on Tuesday last, they have hiked the mortgage rates throughout an assortment of maturities by 15 basis points or 0.15 percentage points. For instance, the Desjardins Group and the Canadian Imperial bank of Commerce (CIBC) will henceforth charge 6.25 per cent on a five-year closed mortgage and 7.20 per cent on a 10-year mortgage. Precisely speaking, these three financial institutions are now toeing the line adopted by the Royal Bank of Canada and the TD Bank, which had announced their decision to raise the mortgage rates about a week ago.

On the other hand, the credit unions will continue to offer interest rates as low as 4.25 per cent on a five-year mortgage.

Mortgage interest rates

Meanwhile, the banks in Canada are acting in response to the mounting expenses of borrowing money for five years to 10 years durations.

The rates of interest related to the financial instruments for durations ranging from five years to 10 years have increased significantly during the last few months. The reason behind the rise in the interest rates said to the growth of the Canadian economy that has left Canada's central bank worried over the upcoming inflation. In fact, keeping this aspect in view, the Bank of Canada has asserted that it is prepared to raise its target rates with a view to lessen these stresses. Therefore, the Canadian mortgage rates have gone up progressively during the last few months.

The economics section of the Canadian Imperial Bank of Commerce has predicted that by 2011, the interest rate on a 10-year Canadian bond will escalate to four per cent. The Bank of Canada said that considering that the forecast of the bank will be a reality, it will denote a gain of 66 per cent in comparison to the 2.41 per cent interest rate on a similar bond just a year back - in 2009!

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