BoC: Home Values?

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Topic: Canada’s Housing Market
10-30% Overvalued Bank of Canada
Governor Statement Dec. 2014


This is from an article that appeared in the Globe and Mail Dec. 15th, 2014 following a study that was done by the bank of Canada. To the statement about properties being significantly overvalued, I (John) disagree. I feel the market is not overvalued, unless there is some major external factor that comes in to play in the future such as a sharp increase in interest rates or if something were to happen locally. Local example: Fort McMurray, where the economy is centered around the oil industry. The real estate market there has been spurred upwards in the past with the lack of supply and a well paid and increasing work force, now could take a hit with the effect of lower oil prices. The Canadian organized Real Estate Industry is like a wonderfully fine tuned instrument that harmonizes market value with market demand taking into account all market factors and forces.


Given time and all things being equal the market will level out as water always finds its level, so to say. We are still adjusting to the approximately 3% five year mortgage rate. Indications are that the national average for home price increases is slowing down as the Canadian Real Estate Association is predicting a 0.9% increase for 2015 and RE/MAX is predicting a 2.5% increase. It will be interesting to take note of the actual findings after the year is complete.


My opinion is the real estate market is most sensitive to mortgage interest rates and in my view interest rates will not increase sharply. However, a 1% interest rate increase would be a sharp one. It would seriously impact the housing market and more so the overall economy as it would begin to take out billions of dollars from the consumption economy. A 1% increase in a mortgage rate would equate to a 33% increase for someone renewing from a 3% mortgage, potentially costing hundreds a month extra, and therefore does give some credit to the Bank of Canada’s study and concern.


In my opinion not only will we not see the Bank of Canada raise its key rate by 1% in the close future, it would be a mistake to do so. Banks are healthy in Canada, recording record profits at the current benchmark. Inflation is under control and the manufacturing and exporting segment of the economy should pick up the slack that may develop from the resource economy. If anything, there is a credible opinion that lowering of the rate would be helpful as our governments are faced with record deficits. They are trying to balance their budgets and as a result cutting back in services. They also have to service the existing debt. Any less in payments of interest by the consumer translates into more disposable income which can only help the overall economy as well as each individual.


I believe real estate will continue to be one of the most important and best investments for the average individual. Your comments, questions and suggestions are most welcome and your continued support is most appreciated.


Sincerely, John Schlett