Canada's housing market shrugs off U.S. tapering efforts
An open secret among residential real estate stakeholders is how little control government officials have over developments. We are, of course, talking about Canadian government officials, whose main job in economic matters often consists of reacting to developments in the United States.
That's particularly true when it comes to interest rate policy, for which the Bank of Canada has been marching in lock-step with the Federal Reserve for several years. Both central banks have keeping rates at near or below zero in real terms.
However, there are signs U.S. policy is about to change. Since early this year, the Federal Reserve, led by its new chairman, Janet Yellen, has been "tapering" its securities purchases. Markets had worried that moves by the U.S. central bank to phase out what is known as its "quantitative easing" program (which many regard as a prelude to higher interest rates) would hurt asset prices, including housing: The good news is that has not happened.
Asset prices point up
Existing home sales via the Canadian Real Estate Association's Multiple Listings Index increased by 5.9 per cent in May, compared to April. The average selling price also rose to $416,600, up an impressive 7.1 per cent compared to the same month last year. That total was boosted by activity in the red-hot Toronto and Vancouver markets. In the rest of the country, the average selling price rose by 5.3 per cent to $336,400.
Builders scrambled to get in on the action. According to the Canada Mortgage and Housing Corporation, housing starts increased to a seasonally adjusted annual rate of 198,300 units during May, up slightly from the 196,700 units the previous month. Better still, the mix improved, with the number of single detached homes (which have a higher dollar value) increasing, and the number of multiple starts falling slightly.
House prices aren't the only thing going up. The Toronto Stock Exchange's benchmark index hit a record high in early June: Low interest rates cut borrowing costs, making it cheaper for companies to boost earnings by buying back stock and, thereby, darkening the relative attractiveness of bonds.
Some warning signs
That said, there are mild, mitigated, cautionary notes. The Bank of Canada warned in its recent semi-annual review of the financial system that the consequences of a sharp correction in housing prices would be large for the Canadian economy. However the central bank rates the probability of such an occurrence as quite low. Similarly the Bank of Montreal recently projected that the country's housing market would move into a protracted slump, as the number of people of home-buying age begins to decrease (although they say that is not slated to happen until 2018).
But just because asset prices haven't reacted to the U.S. Federal Reserve's tapering so far, doesn't mean they won't. For the time being, the reaction, or lack thereof, can best be regarded as a "conundrum." Over the long-term, if the Fed stops buying bonds, you would think interest rates would start to climb.
On the other hand, as John Maynard Keynes, the father of modern economics used to say: "Over the long-term we are all dead."
Peter Diekmeyer is Bankrate.ca's economics columnist. He can be reached at firstname.lastname@example.org