Exclusive: Lender Fall Forecast

As we approach the Bank of Canada meeting on September 8, JAC News asks: Will the Bank of Canada raise rates?  And what can we expect from the fall housing market?

We spoke to several lenders recently and asked for their forecast of the Fall 2010 housing market as well as their opinion on whether interest rates will rise.

Most believe that the Bank of Canada will raise interest rates on September 8 and hold the rate for the rest of the year; which is similar to the forecast given by the big banks.

Lenders also seemed to agree on the fall housing market outlook.  The consensus is that activity will slow down for the rest of 2010 and level off in 2011.  With last month’s stats taking a dip, this could be the beginning of a buyers market.

Ron Swift, AMP, CMB, President, MCAP Service Corporation

“My forecast for the housing and mortgage market for the fall of 2010 is a continued slowdownin the real estate market in terms of existing home sales and new home sales. GVRD and GTA will account for the majority of the slowdown. I also anticipate house prices to edge downward as well.  However, the slowdown in real estate activity will be partly off-set with increased activity in refinances and transfers.

As for, whether the BoC will raise rates in September; I believe they will increase the overnight rate by another 25 bps and then pause for the rest of the year.”

Les Shore, Senior Assistant Vice President, Optimum Mortgage

“We believe we’ll see a 25bp increase in either Sept or Oct this year and nothing further until the later part of Q1 2011 at the earliest.

Our forecast for Ontario is that we’ll see a slow down in activity for the balance of the year (which has already started) and the price increases we’ve seen year to date will moderate somewhat and become flat towards the end of the year.

For Alberta and BC, we expect to see a much softer and slower market than what we’ve experienced in the spring/summer of this year.  Large inventories have created a buyers market and we’ve started to see price reductions.  I expect values will fall somewhat for the balance of the year and by the end of 2010, year over year, values should be flat.

We expect activity to slow slightly in Saskatchewan and remain at the same steady pace for Manitoba.”

Craig Basinger, CFA, Macquarie Private Wealth Strategist

“We are expecting to see another 25 basis point rate increase from the Bank of Canada, then possibly a hold. The rate increase is likely because Canadian economic data has not weakened nearly as much as that of the U.S. or some other major global economies.  In addition, overnight rates are now 0.75%, which is still extremely low from a historical perspective.”

Ron Cuadra, Director, National Sales, Home Trust

“Real estate activity has dropped in the last month or so and we see this leveling off near current levels into the year’s end.  Prices have slowed their rate of increase and we see that prices will stabilize with flat to either very moderate price increase/decrease for the balance of the year.

We see that the Bank of Canada is likely to increase rates one more time before the end of the year and that it is likely to be at the September meeting but given recent weak economic data could be later in the year.”

Darrell Evasuk, BBA, FCUIC, AMP, Associate Vice President, Concentra Financial

“Indications appear to be pointing toward a sluggish fall housing market; the United States very well could be heading into a double dip recession as their economy has weakened over recent months. Increased unemployment, currently over 9% contributed to a 27% decrease in existing sales while activity in new home sales in the states dropped to 12%.

As we know, Canada’s housing market is not as volatile as it has been south of the border; however I believe our economy is still influenced as sales here have dropped by 25%. So, things in the north appear to have cooled off, albeit perhaps for different reasons.

The HST in Ontario and British Columbia may have been the catalyst for early activity and budgetary actions such as the HST increase in Nova Scotia likely curtailed activity in that province.  It appears we are heading for a buyers market in Canada as prices continue rise while sales drop. If that happens we are likely to see reduced sales activity in most provinces and lower mortgage demand in the fall as prospective buyers hold back, perhaps hoping for prices to level off. Newfoundland will likely outpace other provinces.

The US Federal Reserve has already given indications it is going to hold its rate as their economy retreats once again. In Canada our unemployment rate is up ever so slightly, coming in at 8% and housing starts, along with sales, have declined.

However, we seem to be carrying more confidence in ourselves.  As well, the Bank of Canada wants to wean the economy off quantitative easing at some point, which might suggest we are going to see another bump of 25 basis points.  The bond market has performed well, so there should be limited effect on mortgage rates.”

John Bordignon, EVP Strategic Development, Paradigm Quest Inc.

“With interest rates at an all time low, specifically on the fixed rate side it is a good time to buy, the problem is Canadians as a whole are at the top of their credit capacity and there is some concern about a downward trend in the economy, house prices seem to be declining and I think consumers will sit on the side lines and take a “wait and see” attitude. This means a slower demand for housing and mortgages. My prediction is a soft fall market.

There is a 50/50 chance that overnight rate will go up…..if it does not go up in September the view is by year end we will see a 25 bps increase.

Canada’s GDP is slowing however if the resource and commodities sector get any lift or if there is some positive news in either US or Europe, we will see the Bank of Canada increase prime sometime this year.

Watch long term rates if there is any global positive news; we may see a rise. The markets globally are cautious; however any momentum and long term rates will rise. It is a tough time to predict rates because of the uncertainty; maybe a good time to convert from ARM rates while the fixed rates are so low. We anticipate a slower Q4 in both real estate and mortgage activity.”

Sébastien Lavoie, Economist, Laurentian Bank Securities.

“A lull in the housing market just started this summer, and is likely to continue this fall. After substantial gains stemming from exceptionally low mortgage rates, housing activity is likely to drop during the second half of 2010. Demand has already started to show signs of waning: resale activity declined substantially this summer, but prices are remaining firm for the moment. Looking ahead, the resale home market is likely to move from a seller’s market to a balanced market in most Canadian cities. Home prices could dip slightly in a few markets, including Toronto and Vancouver – both affected by the recent HST harmonization.

Of course, softer activity in the resale market will temper the enthusiasm of homebuilders. We predict that housing starts will reach approximately 165,000 units (annualized) over the next five quarters, down from 200,000 units in the first half of 2010. That level is similar to what was seen in 2001 and represents a 40% contraction compared to the record of 246,200 units observed in Q3 2007.

However, we must not jump to the conclusion that the Canadian housing market is on the verge of undergoing a severe correction as happened in the United States. The recent bond rally notably led to modest decline in fixed mortgage rates. Floating rates are also highly attractive, given that the Bank of Canada is likely to take a pause this fall after one last hike on September 8th (see below for more details). Also, the job market is performing remarkably well, which will help to support housing demand to a respectable level going forward. In contrast, July’s slump in new and existing home sales south of the border suggest the US housing sector is still looking to find a bottom, and that renewed home price depreciation is still in the cards.

Certainly, the list of arguments supporting a 25bp hike on September 8th is getting shorter by the minute, while the list of factors supporting a pause is growing fast. The Bank of Canada (BoC) could easily defend a “pause” or a “one and done” strategy in two weeks from now. Nevertheless, LBS Economic Research is still leaning – slightly we might add – towards one last 25 basis points hike, mainly for two reasons. Firstly, Tom Hoenig’s concerns in the US about overly low interest rates apply to Canada. By raising the overnight rate target from 0.75% to 1.00%, which after all is still a very low level, the BoC can just improve financial stability over the medium term. No one will blame the BoC from hiking from 0.75% to 1.00%. The BoC would probably not bring back the policy rate to 0.25-0.50% even if the North American economy was turning south. Moreover, the rally in bonds prices pushed down some of consumers and businesses’ key borrowing rates during the last month even though Governor Carney has lifted the overnight rate target by a cumulative 50 basis points so far this summer. The BoC’s own household and business effective interest rates calculations show an easing of 10 basis points so far in August. A tightening in the policy rate combined with an easing in borrowing rates for economic agents is an atypical situation at this stage in the cycle, something that may have caught the BoC by surprise, adding chances of a 25 basis points increment.

We’ve made our case. However, it worth looking at the other side of the spectrum. There is one key argument, , on top of a darker economic sky, supporting a pause on September 8th: The BoC has warned the markets on several occasions that “nothing is pre-ordained”. If investors do not listen, we could assist to a repeat of June 10th 2008 all over again. Let us refresh our memories for a moment: Economists were unanimously expecting one last 25 basis points rate cut in June 2008 before the BoC embarks on the sidelines because crude oil prices were above $US100 per barrel and total CPI inflation was well above the 2% target, near 3%. Well, Governor Carney did not keep his arms crossed for an instant; he shocked the bond market by keeping the policy rate at 3.00%. Admittedly, the level of rates and the macroeconomic picture were very different then from what we are seeing now. Nevertheless, that episode from the summer of 2008 puts an interesting question mark on our prediction for September 8th. Between now and then, just a few statistics – real Canadian GDP for 2010Q2, ISM data, and US payrolls – could tip the balance one way or the other.

Finally, LBS Economic Research does not see the overnight rate target cannot rise beyond 1.00% by the end of 2010. Once the BoC signals a pause, it will remain on the sidelines for a long period until a long lasting period of bright sunshine reappears. In other words, we do not see for the moment how the BoC could play a “stop n go” game in late 2010/early 2011.”