BMO Canadian Housing Outlook: Tailwinds and Headwinds Point To Soft Landing

Tailwinds include low mortgage rates, relatively low unemployment and strong immigration, while high prices, elevated household debt and slowing employment are cause for concern. - More buyers are turning to variable rate mortgages on expectations that rates could stay low for some time, or even decline. - Average Canadian house prices were a record two-thirds more than average U.S. house prices.

TORONTO, ONTARIO, Sep 30, 2011 (MARKETWIRE via COMTEX) -- After a decade of strong growth in the Canadian housing market, residential real estate is headed for a "soft landing" with prices moderating in the months ahead, according to a Special Report from BMO Economics.

Low interest rates have fuelled Canada's housing market in the past decade, pushing prices to new highs in most regions. Sales are now close to their past-decade norm, and well below pre- and post-recession peaks, while residential mortgage demand has also moderated. However, a weaker economy and new mortgage rules have dimmed activity recently.

"Since the prudent and timely mortgage rule changes announced early this year by Finance Minister Jim Flaherty, Canadian house prices have moderated," said Sal Guatieri, Senior Economist and Vice President, BMO Capital Markets. "House price gains are slowing. Although average resale prices rose a brisk 7.7 per cent year-over-year in August, the rate of increase has slowed from nearly 9 per cent earlier this year."

Mr. Guatieri noted in the report that housing activity should remain moderate in the year ahead, with tailwinds including low mortgage rates, relatively low unemployment and strong immigration. Furthermore, a weak global economy and Europe's debt crisis will likely keep the Bank of Canada on the sidelines until early 2013, while further easing measures by the Federal Reserve should suppress long-term rates in both countries, thereby supporting affordability.

On the flip side, Mr Guatieri noted that the housing market also faces several challenges, including high prices, elevated household debt and slowing employment.

"Prices have risen twice as fast as incomes in the past decade, lifting the current ratio 16 per cent above its norm. Although the current overvaluation is below levels that triggered price corrections in Canada in 1989 and the U.S. in 2006, it will remain a thorn in the side of first-time buyers," said Mr. Guatieri. He added that for bargain hunters, Canadian houses, on average, cost a record two-thirds more in local currency terms than properties in the U.S.

The upshot is that home sales are likely to remain steady in 2012 and prices should also stay put. However, the resource-rich provinces, notably Alberta and Saskatchewan, should outperform other regions since their economies are expected to grow the fastest. Because housing is moderately overpriced in most regions (and considerably so in Vancouver), it's vulnerable to a correction.

"Regardless of the current low interest rates, it is still important for homeowners or potential buyers to be prudent and stress-test their mortgage against a higher interest rate to ensure they can afford what they signed up for. Total housing expenses should not consume more than one-third of total household income," said Katie Archdekin, Head of Mortgage Products, BMO Bank of Montreal.

Ms. Archdekin added that Canadians need to be continually examining ways to reduce overall housing costs. "BMO has developed products, such as the low rate mortgage with a maximum 25-year amortization, that we believe are directly relevant to today's environment and specifically designed to help Canadian consumers manage their debt. Furthermore, the lower amortization can significantly reduce the amount of interest paid over the life of the mortgage."

Additional factors expected to affect the future of Canada's housing market:

        
        --  The biggest threat stems from the perceived one-in-three chance of a
            recession, and the attendant loss of jobs.
        --  Another risk, though far smaller, is if interest rates spike higher next
            year. Even a moderate 2 percentage point increase in rates would
            severely impact affordability. Low rates are a threat too, since they
            could cause the market to heat up again, only to correct when rates
            eventually rise.
        --  Mortgage growth is expected to moderate as Canadians turn more cautious
            in managing their debt. Despite slower personal credit growth, household
            debt hit a record 1 1/2 times disposable income in Q2, as residential
            mortgages continued to outrun income.
        --  Meanwhile, job and income growth should moderate next year, as the
            economy is expected to grow just 1.8 per cent versus about 2.2 per cent
            this year.
        --  More buyers are turning to variable rate mortgages on expectations that
            rates could stay low for some time, or even decline.
        
        

        
        Contacts:
        Matt Duffin, Toronto
        (416) 867-3996
        matthew.duffin@bmo.com
        
        Sarah Bensadoun, Montreal
        (514) 877-8224
        sarah.bensadoun@bmo.com
        
        Laurie Grant, Vancouver
        (604) 665-7596
        laurie.grant@bmo.com
 
www.bmo.com            

Ottawa takes aim at immigrant waiting lists a million names long

HEATHER SCOFFIELD

The Canadian Press

Published Friday, Sep. 30, 2011 5:59PM EDT

Last updated Friday, Sep. 30, 2011 6:10PM EDT

The lineup of people wanting to immigrate to Canada has grown steadily under the Conservatives' watch, despite government attempts to make the system more efficient.

Officials from the Immigration Department confirm that the waiting list to process immigration applications is now more than a million names long.

The long list means many years of uncertainty for some families here and abroad, and a tarnished reputation for Canada in the global competition for skilled workers.

“Huge problem,” tweeted Immigration Minister Jason Kenney this week.

He has spoken frequently about the need to streamline the immigration system, but the matter has now risen toward the top of his political agenda.

The House of Commons immigration committee has just agreed to hold eight hearings on the matter, beginning next week.

And Mr. Kenney has made curtailing the backlog a priority as he undertakes a major review of the level and mix of immigrants allowed into Canada.

He is in the final stages of that review, although his final assessment is not expected soon.

However, Ottawa has cut back on the overall number of immigrants allowed into Canada this year, critics point out.

Clamping down on the number of acceptances is just lengthening the waiting list, and also taking the federal government further away from its goal of fuelling the Canadian workforce with immigrant labour, says NDP immigration critic Don Davies.

He points out that Mr. Kenney has said any growth in Canada's labour force will need to be completely supplied by immigration within five years.

“How are we going to meet that economic reality? I don't think they're responding to their own projections,” Mr. Davies said in an interview.

Mr. Kenney's officials say immigration is as high in Canada now as it ever was, and 2010 was a sudden spike that skewed the numbers. Still, the minister has also indicated that a huge increase in immigration is not in the cards any time soon.

“While Canada continues to welcome historically high numbers of new immigrants, and maintains the most open and generous immigration system in the world, we have to carefully manage the large number of people who want to be Canadian,” Mr. Kenney's spokeswoman, Candice Malcolm, said in an email.

That leaves finding ways to curtail applications as the only solution to getting rid of the backlog.

Indeed, Immigration Canada has taken steps in the past few years to control the waiting list.

Since 2008, the minister has had the power to limit applications in certain categories. Mr. Kenney has exercised that power for foreign skilled workers and, most recently, the investor program. Canada is not accepting any more applications in the investor program until next summer.

As a result, and also because immigration officials are being pushed to process applications faster, the rate of increase in the backlog has diminished over the years, officials say.

Plus, the wait for some categories of workers — people who have a job lined up, or professionals badly needed in Canada — are usually approved within months.

But others — especially parents and grandparents of permanent residents, and immigrants who applied before the systemic change in 2008 — can spend up to eight years before they receive word about whether they are accepted or rejected.

Now, the challenge is to prevent the list from continuing to grow.

Mr. Davies says that if increasing immigration is not an option, there are two other ways to go about it: boosting government resources to handle the paperwork, or placing stricter limits on accepting applications.

But he says the government won't entertain an increase in resources.

“They're not doing that, leaving only one policy option, which is to shut the door on the number of applications that can be made,” he said. “I think they already have a pre-ordained answer. ... They're going to limit the numbers of applications for the first time in history.”