1 September 2010
“All we need now is a 1% increase in the mortgage rate above the two-year average in a given month”. He shows the examples of previous Vancouver and Toronto bubbles’ bursts.
According to Macdonald there are three main ways to solve this problem:
1. We should go back to 25-year amortizations on insured mortgages.
2. The Bank of Canada should increase rates by no more than approximately 1% over the next 24-month.
3. The banks shouldn’t raise rates after the Bank of Canada increases its overnight rate.
The deal is that these “solutions” make practically no sense today.
Fist of all, the long-term amortizations are already priced enough into the home prices. Actually, tens of thousands of buyers used 30- to 40-year amortizations. It can be too late to eliminate long-term amortizations at this point.
Another important thing is that the Bank of Canada has its main goal – the inflation control. It means that all other problems are secondary. That’s why if inflation reaches the dangerous level, the BoC will raise rates any way.
And finally, the majority of borrowers with long-term amortizations are well-qualified, so they are going to take the main hit.
Speaking about the banks not raising rates, it’s probably the most absurd advice we’ve seen in months. The deal is that:
1. Banks are there not to lose money.
2. The banks’ shareholders would disagree with such actions for a certain reason.
3. Even if the banks postpone the rate increase, it won’t change anything, because sooner or later they will still have to do it. So it’s just a matter of time.
4. The Big 6 rate fixing would influence the non-bank lenders greatly. And they won’t be able to withstand such a hit.
Such unrealistic “solutions” provoked great discussion. One of the examples is a report from the C.D. Howe Institute, released on the same day.
In the end, the majority believes that a natural price correction is coming: from 5% to 15% (in some regions more, in others – less). It’s quite possible that such a correction can be really enough to normalize the home prices without any government or bank intervention.
And the last, but not the least, was Canada Mortgage and Housing Corporation (CMHC) new housing market outlook, published lately. They expect more moderate housing activity with prices even increasing slightly in 2011.
They also predict that mortgage rates will rise a little bit in the second half of 2010 and during the course of 2011. Yes, these increase forecasts reflect David Macdonald’s warnings concerning Canadian household problems, but CMHC also predicts certain positive gain in the employment and income sphere.
It’s quite amusing that the majority of big bank economists didn’t agree with Macdonald’s pessimistic view and forecast.