Bankrate

 

June 15, 2014

 

Canadian housing shrugs off Fed taper

Tightening by the US central banks appears to have had little effect on asset prices…so far.

 

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 that US policy is about to change.  Starting early in 2014 the Federal Reserve, led by its new chairman, Janet Yellen, has been “tapering” its securities purchases. Markets had worried that the US central bank phasing 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 nothing of the sort has occurred.

 

Asset prices point up

Existing home sales made via the Canadian Real Estate Association’s Multiple Listings Index increased by 5.9% in May compared to the previous month. The average selling price also rose to $416,600, up an impressive 7.1 percent 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 percent 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 unit pace the previous month. Better still the mix improved: the number of single detached homes (which have a higher dollar value) increased, and the number of multiple starts fell slightly.

 

House prices weren’t the only thing going up. Stocks too, boosted by the continued low interest rates which cut borrowing costs, make it cheaper for companies to boost earnings by buying back stock and darken the relative attractiveness of bonds, have also been rising. The Toronto Stock Exchange’s benchmark index hit a record high in early June.

 

Some warning signs

That said there have been 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 in the home buying age begins to decrease. Yet that is only slated to happen in 2018 the bank says.

 

But just because asset prices haven’t reacted to the US Federal Reserve’s tapering so far doesn’t mean they won’t. For the time being, the reaction, or lack thereof, can best 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@peterdiekmeyer.com

 

-30-

 

  


Home | Gazette articles | Finance/Economics | Foreign affairs | Defence | Magazine/ Gvmt | Book reviews

peter@peterdiekmeyer.com

© 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998

 Peter Diekmeyer Communications Inc.