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Notable News of the Week: July 6, 2012

Each week, brings you the Notable News – a compilation of the latest news and most relevant headlines from the mortgage and housing industry. This week, the big banks warn Ottawa of their concerns over the new lending rules; the Bank of Canada may hold interest rates by July of 2013; and in terms of the difference in real estate value, Canadians may be richer than our American neighbours.

New mortgage rules a risk worth taking, Flaherty says – Vancouver Sun

Although the new mortgage rules may discourage experienced home buyers and first-time home buyers alike from borrowing too much and ultimately dampen the fragile economy, Finance Minister Jim Flaherty says its a risk worth taking. A TD Bank analysis recently calculated that the measures would likely have the effect of dampening economic growth by 0.2% in 2013. In response, Flaherty says, “we are prepared to take that risk, because of the greater risk of the development over time of a housing bubble.”

RBC and TD warn Ottawa over new lending rules – The Globe and Mail

Canada’s biggest banks are raising concerns that the federal government’s new mortgage rules might hit the economy harder than intended if left in place for too long. RBC and TD believe the new rules will have a dampening effect on the country’s economy and will ultimately slow the banks’ loan growth in the coming year. RBC forecasts growth in mortgages will be in the low single digits, down from more than 6.0%.

David McKay, head of Canadian banking at RBC asks, “Would we consider going back to a 30-year amortization when we are able to raise rates, to alleviate the strain on the consumer wallet, and balance growth in the economy?” He also questions the long-term implication of the rule changes in a high rate environment. The changes may only be needed on a temporary basis and could do inadvertent damage if kept permanent. However, a government official said it was too soon to know whether Ottawa will contemplate a return to 30-year amortizations.

Canadians are richer than they think – The Globe and Mail

Due to the difference in real estate value, the average Canadian is richer than the average American. For the first time, net worth per Canadian household over the past five years has exceeded net worth per American household (total combined value of liquid and real estate assets minus debt).

Currently, the average Canadian household is over $40,000 richer than the average American household. Since the 2008 economic crisis and the collapse of the U.S. housing market, American house prices dropped significantly (now over $140,000 on average), while Canadian real estate became more valuable. In fact, Canadians hold more than twice as much real estate as Americans and, once mortgages are factored in, have almost four times as much remaining equity in their real estate.

Bank of Canada likely to hold interest rates until July 2013 – Financial Post

The Bank of Montreal predicts that the Bank of Canada will keep mortgage rates low and will not raise its key interest rate until July 2013. The changes stem from the easing policy of the U.S. Federal Reserve, a downgraded economic outlook and tightened mortgage rules, according to Michael Gregory, BMO senior economist. He says, “the tightening of the government’s mortgage insurance rules does serve to act like higher interest rates specifically for that sector […] So that takes some of the urgency away from the Bank of Canada to adjust rates any time soon.” Gregory also expects the BoC will change its projections for economic growth in its monetary policy report on July 18, 2012.

The ‘Manhattanization’ of Toronto will change family-housing dreams – CBC News

Within the next ten years, central Toronto is expected to undergo significant changes as the supply of detached homes decreases while the remaining ones soar in price, according to real estate experts. Currently, single-family homes are shrinking in stock and are under fierce bidding wars, in some cases $200,000 or more over the asking price, often with no conditions attached to the offers to purchase. Prices for single-detached homes and town houses are forecast to increase 30-50% in the next ten years. On the other hand, prices for condos are expected to rise only moderately or stay flat as the oversupply in this market continues to grow. Thus, condo living remains the default housing option for those who want to remain in the core of Toronto.

This phenomenon is what Brad J. Lamb, a real estate mogul, refers to as the “Manhattanization” of Toronto. Such a phenomenon is a norm in other big cities such as Hong Kong, Tokyo, London and Paris. However, “we’re at least a decade away before families truly cannot afford houses in Toronto and have to start considering condos as an option,” says John Pasalis, president of Realosphy Real Estate Brokerage.