Some economists are claiming the worst of the recession is behind us. BMO expert John Turner recently spoke with CMP's sister publication, CRE, about what this could mean for the real estate market and interest rates going forward.
There have been whispers that we may be nearing the end of the recession. Can you comment on this?
John Turner: According to BMO's Economics Department, the whispers are turning to shouts. Canadian consumer spending has turned upwards, while the housing market has seen an astonishingly fast recovery. Financial conditions are much improved and confidence is on the mend. BMO Economics estimates that Canada's recession ended in the third quarter, following three consecutive quarterly contractions. Aggressive monetary stimulus and hefty fiscal spending appear to have turned the economy around a little sooner than previously thought.
Do you think the Bank of Canada, by making the announcement on July 23, 2009 that the recession is over, is preparing Canadians for a rate increase (even though it said it wouldn't for 12 months)?
JT: BMO's economists think not. They think the Bank truly believes it won't need to raise rates until mid-2010. The recovery, at least initially, is expected to be soft due to weak U.S. demand. The unemployment rate is expected to climb moderately further, and inflation should remain below target for a couple of years until the slack is absorbed.
It was recently reported that home sales have jumped 40 per cent between January and May 2009. Aside from low interest rates, what other factors could have contributed to buyers getting off the fence and purchasing?
JT: There are a number of contributing factors, including pent-up demand accumulated during last year's downturn, the federal government's tax credit incentive for first-time home buyers, a growing sense that the worst of the global economic crisis is behind us and the government's insured mortgage purchase program which kept the credit taps flowing.
Of course, with interest rates being relatively low, this means lower mortgage payments for both first-time homebuyers as well as others. In some areas, prices have been holding steady and/or decreasing with recent market compression; this has led to better access to homeownership, which is a great investment. Everyone needs a place to live, and buying a home not only fulfils that need but also acts as an important component of a wealth accumulation strategy.
How might the forecasted increase in housing starts affect the real estate market from a buyer's perspective?
JT: BMO's economists expect housing starts to trend higher as the economy recovers, but remain soft for a while as a result of some overbuilding during the previous boom. The rising starts will help to keep the market balanced, since it now risks shifting back to a sellers' market if demand remains strong. The current four-month supply of resale listings is in line with, if somewhat below, historic norms.
The age old debate of fixed vs. variable is alive now more than ever. What should buyers take into consideration when deciding?
JT: It all depends on what the buyer is comfortable with and what they're looking for. Fixed rate mortgages are great for Canadians who are concerned about upward pressure on rates and who are looking for peace mind. With a fixed rate mortgage they get the peace of mind of knowing what their payments are going to be and how much of their mortgage they will have paid down at the end of their term.
On the other hand, variable rate mortgages - when taken over the long-term - have proven to be a winning strategy for Canadians over the last 25 years. Each buyer's circumstances are different and we invite Canadians to speak to a BMO Bank of Montreal mortgage specialist for the best individual advice.
For the rest of the interview, see October's issue of CRE, on newstands now.