April 12th, 2005

Blurb: Historically low interest rates are a major reason underlying record high home ownership levels among Canadians.

BoC stays the course

By Peter Diekmeyer o Bankrate.com

Today's decision by the Bank of Canada to keep its key interest rate stable is good news for the country's construction workers, real estate agents and homeowners. It is also a major reason that home ownership in this country is rising to record levels.

The bank announced that its key rate, --the amount it charges overnight borrowers,-- will remain at 2 1/2%, making it the fourth consecutive announcement it has declined to move.

The overnight rate directly or indirectly influences the rates that the country's banks and other financial institutions charge for a variety of loan and deposit products. These include consumer mortgages, which are a key determinant of housing affordability. The bank cited a stable economic climate as motivating its decision.

"The outlook for the economy and inflation, the analysis of factors at play are essentially unchanged (since the start of the year)," read the statement announcing the bank's move.

The bank uses its influence over interest rates to try and balance two competing goals: maintaining stable economic growth and keeping core inflation in the 2.0 percent range. In recent months, job growth has been relatively stable, and inflation remains moderate, trends that have enabled the bank to keep its key rates at historically low levels. The result has been a Canadian housing sector that has showed impressive resilience despite a series of good years.

New home construction remains strong
The construction industry continues to boom. Housing starts rose 0.3 percent on a seasonally adjusted basis to 218,500 in February, according to the Canada Mortgage Housing Corporation. Though starts are slowing slightly on a year-over-year basis, 2004 was a strong year, which means that construction activity remains historically high.

Real estate agents are also continuing to rake it in. According to the Canadian Real Estate Association, the value of existing home sales made through the associations Multiple Listing Service hit $9.16 billion in February, an all time high, beating the previous record of $9.1 billion set in March 2004.

Real estate activity remains strong
Houses continued to be a great investment, with the price of the average house sold in Canada during February rising to record $237,778, up 8.3 percent from a year earlier. These gains appear to be well distributed with British Columbia, Alberta, Saskatchewan, Ontario and Nova Scotia all setting all time record highs. According to one expert, there may be more good news to come.

"The continuation of low interest rates and price increases in recent years, may result in more move-up home-buying activity during the spring season," said Gregory Klump, the Canadian Real Estate Association's chief economist. However Klump expects that rising prices could begin putting a damper on housing demand later this year.

Home ownership on the rise
Not surprisingly, more Canadians now own their own homes than ever before. According to calculations by Adrienne Warren, an economist at Scotiabank Group, Canada's home ownership rate is now approximately 67%, up from 65.8 percent rate recorded in 2001, the date of the latest census.

The Canadian home ownership level is especially strong when compared to its southern neighbor. U.S. home ownership is only slighter higher than in Canada, (69 percent), despite the fact that mortgage interest payments are deductible in the U.S., a measure that provides significant incentives for Americans to buy, trade-up, or upgrade their homes.

Housing market boosted by strong demographics
Although low interest rates were a key reason for the increase in home ownership among Canadians, Warren cites several additional demographically related reasons. Among the most important is the country's aging population, which has pushed a higher percentage of Canadians into age categories where home ownership is more common.

That said, home ownership is also rising among the very elderly, who are increasingly healthy and thus hanging on to their homes longer than ever before. According to Scotiabank, 66.2 percent of households headed by someone over the age of 75 owned their own homes in 2001, an increase of four percentage points in just five years.

However Canada's housing stock continues to be poorly distributed in generational terms, with just 15.9 percent of households headed by someone under 25, owning their own home.

But according to Warrens, after several good years, it looks like the good news on the home ownership front is beginning to taper off. "Disposable income generally kept pace with home price increases during the 1990s," wrote Warrens, in a recent report. "(But) prices have been rising at a much faster rate since 2002."

The Bank of Canada's monetary policy report will be released on April 14, 2005 and its next rate announcement is scheduled for May 25th, 2005.

 

 

Previous Bank of Canada action:

Date Action Overnight rate (after announcement)

April 12, 2005 No change 2 1/2%
March 1, 2005 No change 2 1/2%
January 25, 2005 No change 2 1/2%
December 7th, 2004 No change 2 1/2%
October 19, 2004 +1/4% 2 1/2%
September 8, 2004 +1/4% 2. 1/4%
July 20, 2004 No change 2%
June 8, 2004 No change 2%
April 13, 2004 -1/4% 2%

 

peter@peterdiekmeyer.com

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