RBC: cooling market in 2015 but real test to come

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One reader believes variable rate mortgages will continue to be the best option for clients going forward, following one big banks market forecast for 2015.

"I think this forecast means that prime rate will remain low just that much longer as it is the only interest rate that the Bank of Canada can control -- almost directly," Layth Matthews of RateMiser said on MortgageBrokerNews.ca. "So variable rate mortgages are still the risk-adjusted best way to go."

The comment was in response to RBC forecasting housing pricing deceleration and a cooling market next year.

“We expect that rising interest rates and increasingly strained affordability will cool Canada’s housing market during the next year and cause home prices to decelerate substantially in 2015,” the Royal Bank’s most recent Canadian Housing Forecast report states. “We forecast home resales to edge slightly lower by 0.9 per cent to 463,100 units nation-wide in 2015 following an increase of 2.1 per cent to 467,200 units in 2014; and home price gains to moderate to just 1.1 per cent next year from 4.3 per cent this year.”

RBC’s latest forecast joins a chorus of economists who also expect a soft landing next year, including the Conference Board of Canada.

“The apartment condominium market enjoys a reasonable outlook; after considerable angst about prospects of a general housing market crash, most analysts, including us, now believe the Canadian market is not a bubble about to burst, but will land softly,” the conference board’s latest report, commissioned by Genworth Canada states. “There are pockets of higher risk, like potentially overbuilt condominium markets in several eastern cities, notably Toronto, and the possibility that slowing offshore demand could derail market recovery in Vancouver.”

For its part, RBC believes 2016 may see more drastic declines.

“The bigger test could well await after 2015 should interest rates normalize fully over the medium term,” the report states. “In this case, we could see outright price declines in the 2016 or later timeframe because we believe that prices will be the principal adjustment mechanism preventing affordability from reaching dangerously poor levels in the face of a substantial cumulative rise in interest rates— growing household incomes would provide only partial offset.”
 
  • Angela Wong-Liao - Invis Inc on 2014-08-22 11:10:05 AM

    After 40 years in the banking/financing industry, I am not surprised that we are edging towards the end of the boom cycle. Yes, I fully agree one of the major driver for the housing boom is pricing, our current interest rates are in an all times low and when interest rates inches up in 2015 and subsequently normalize the interest rates to around 4-5%, real estate market will slow down but I believe in a more soft landing result versus a crash. In my opinion, Canada has one of the most stable and regulated banking system in the world, our Canadian banks will not resulted in an American style melt down as in 2008.

  • Layth Matthews on 2014-08-22 11:52:45 AM

    The tricky thing about this forecast is that it implies interest rates "normalizing" at a time when home values are flat or declining. If home prices are weak the reverse wealth effect alone would tend to put downward pressure on Canadian mortgage rates, not to mention the weak employment in the housing sector.

    The real concern is that the US recovery creates international demand for capital, which could raise Canadian mortgage rates in an untimely fashion, i.e. despite our soft housing market.

    I think this forecast means that prime rate will remain low just that much longer as it is the only interest rate that the Bank of Canada can control - almost directly. So variable rate mortgages are still the risk adjusted best way to go!

    International demand for capital can drive up fixed rates and can shrink the available discount on variable rates. But if the housing market/employment is weak the BOC can at least hold down prime.

  • Kuldip S panesar Homeland Mortgage Corp. on 2014-08-22 4:14:44 PM

    This forecast is based only on Interest Rate in Canada the housing market is not in boom at this time ,it is stable or declining. Interest rate alone is not only one factor that regulates the real estate market. Interest rate is determined by the demand and supply of the money . If the rate of interest go up more money will be come in the market and the rate of interest will be settled down.BOC is also watching the system all the times and interfering in the money market by changing the overnight rate. Keeping in view all economic factors of Canada and USA it cannot be predicted that interest rate will go up and crash the real estate market.

  • Victor Simone on 2014-08-22 5:11:22 PM

    @Layth Matthews
    So true about Canada's domestic interest rates, being a reflection of the global demand and competitive pressures for money. Canada's real estate market has been lucky these past years, in that the low interest rates are in vogue all over the world. There seems to be no real fight for higher rates. Ten and twenty years ago there was just so much more rate movement.

    Until nations really start to compete for money again, Canada will continue to enjoy some of the lowest interest rate ever.

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