For existing homeowners considering whether to take out a second mortgage or home equity loan, a primary concern is whether their home is holding (or increasing) its value, therefore securing existing home equity. To address this concern, the most important question is whether the plethora of recent news about Canadian housing markets – a growing inventory of existing homes for sale, a drop in new home construction, and a marked slowdown in home sales in the second half of 2010 etc. – signifies a blip, dip or hardship in terms of home prices and the amount of home equity homeowners have accumulated over the past decade. RBC Economics recently released an Economic and Financial Market Outlook forecast that should largely allay such concerns.
With the expiration of the homebuyers’ tax credit curtailing home sales, and despite “affordability levels [that were] historically attractive and mortgage rates at all-time lows,” RBC’s analysts point out that existing home sales, and (in turn) new home sales,
dropped into what they classified as a “cyclical low” in July. This resulted in a record number of homes for sale on the market, but does not mean that Canadian markets are necessarily susceptible to the drastic erosion of home values seen in the United States over the past several years, as interest rates remain low and the economic recovery in Canada remains more or less on track.
The RBC economists note that – even with the Bank of Canada raising its overnight lending rate by 0.25 per cent at each of their June, July and September meetings – at only 1.0 per cent “the Bank’s main policy rate remains historically low and continues to be stimulative for the economy.” Nevertheless, following what RBC’s analysts called a “remarkable rebound” in Canadian housing markets in 2009 and early 2010, “the pent-up demand generated during the economic downturn was satisfied, and the run of buying ahead of the implementation of the Harmonized Sales Tax [on July 1] and tighter mortgage rules was spent.”
With the drop in home sales and the sizable increase in the inventory of unsold homes on the market having prompted some analysts to “talk of Canada’s housing bubble having burst,” RBC’s economic team downplayed such doomsday prognostications. “Our assessment,” they note, “is that the sales pace has returned to more sustainable levels after one-off factors [i.e., the cancellation of the homebuyers’ tax credit, introduction of the HST and tighter mortgage rules] supported a period of unexpected strong activity.”
Pointing out that overall housing prices in July were only 2.1% higher than a year ago, the near-term forecast of RBC’s analysts is that “sales will continue to moderate with more stable conditions to follow in 2011 as firming labour market conditions and population growth offset the effect of a gradual increase in interest rates.” They conclude that house prices will follow a similar trend, but that “the very rapid increases reported early in [2010] are unlikely to be completely unwound, meaning that on average prices will be 8% higher in 2010 than in 2009.”
In short, it appears that recent home sales and pricing numbers are a blip, or at most a dip. RBC’s economists conclude that market fundamentals do not support the highly touted bursting bubble thesis, a reassurance for existing homeowners who are considering accessing the existing equity in their home through a second mortgage or home equity loan.
