Canadian house prices will come off the boil next year, rising only modestly after a mini-boom in the middle of the pandemic, according to a Reuters poll of property market analysts who still expect affordability to worsen in the coming years.
What may accelerate the slowdown already in train is the impending shift in monetary policy now the country is emerging well-vaccinated from the pandemic and the economy is expanding strongly again.
Strong prospects for the Bank of Canada to raise interest rates as early as next year from record lows have analysts convinced the market isn’t necessarily cooling yet, but the worst of the heat is starting to disperse.
“The dramatic fall in interest rates created a sense of urgency to get into the market, so in many ways people borrowed activity from the future, and now it seems the future has arrived,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets.
“Never before has the housing market been so sensitive to the risk of higher rates. A lot of debt has been taken on, in a very low rate environment, so even a modest increase in rates can have a notable impact on housing demand.”
Home prices have soared about 25% since the pandemic began and around 200% in the last 16 years, according to Canadian Real Estate Association data.
After an expected 16.0% rise this year, average house prices nationally will increase just 3.2% next year, the August 11-19 poll of 16 economists showed. That was a downgrade from 3.7% predicted three months ago.
Around three-quarters of respondents expected demand for housing to ease across the country this year, including in hot spots like Toronto and Vancouver, while nearly 60% predicted that the chill would linger at least a little while longer.
Higher interest rates were identified as the biggest downside risk to the Canadian housing market over the next 12 months, according to over 45% of respondents, 7 of 15, who responded to an extra question.
Over 25% said it was the potential spread of new coronavirus variants.
NOT ENOUGH HOMES TO BUY
A supply-demand imbalance, which was already heavily skewed before the pandemic began, has pushed home prices out of reach for most first-time buyers. Consumer price inflation at a decade high has only made it worse.
“The supply shortage issue is also related to the affordability issue, which is, are Canadians building the types of homes that are best suited to the whole population?” asked Brendan LaCerda, senior economist at Moody’s Analytics.
“First-time homebuyers will feel the pain more acutely in particular. Saving up for the down payment is much more difficult when you are chasing rising prices.”
About 70% of respondents, 11 out of 16, expected affordability to worsen over the next two to three years.
The broad trend of double-digit price gains this year followed by a moderate rise next year is likely to be the case for major Canadian cities as well.
In Toronto, the poll predicted they will rise just under 15% in 2021 and 4.0% next. In Vancouver, they are expected to increase 13.2% and 4.0%, respectively.
Poll respondents rated those two cities a 9 on a scale of 1 to 10 for expense, where 10 is the most expensive, compared with a median of 7 for the country as a whole.
Although Canadian housing starts are high by historical standards, hitting a new record earlier this year, they are far short of strong demand, even during the pandemic when immigration has been limited.
Asked how long it would take for the shortage to ease, 60% of respondents, or 9 out of 15, said it will be over two years.
“There is no end to the supply shortage in sight in the Canadian housing market, even beyond a two-year horizon,” said Jean-Francois Perrault, senior vice-president and chief economist at Scotiabank.
(For other stories from the Reuters quarterly housing market polls:)
(Polling by Swathi Nair; Editing by Ross Finley and Jan Harvey)
Canadian dollar notches biggest gain in a month as stocks rally
The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Thursday as investor sentiment picked up and domestic data showed that retail sales fell less than expected in July.
World stock markets rallied and the safe-haven U.S. dollar retreated from one-month highs as worries about contagion from property developer China Evergrande eased and investors digested the Federal Reserve’s plans for reining in the stimulus.
Canada is a major exporter of commodities, including oil, so the loonie tends to be particularly sensitive to investor appetite for risk.
“The assumption here is that (Fed interest) rate hikes are still a long way out and so equities markets can still perform with accommodative financial conditions,” said Mazen Issa, senior FX strategist at TD Securities in New York.
“Consequently, currencies that have a higher beta to the equity market, like the CAD, can do alright.”
U.S. crude oil futures settled 1.5% higher at $73.30 a barrel, while the Canadian dollar was trading up 0.9% at 1.2653 to the greenback, or 79.03 U.S. cents.
It was the currency’s biggest advance since Aug. 23. It touched its strongest level since last Thursday at 1.2628.
Canadian retail sales dipped 0.6% in July, compared with expectations for a decline of 1.2%, while a preliminary estimate showed sales rebounding 2.1% in August.
Canadian government bond yields were higher across a steeper curve, tracking the move in U.S. Treasuries.
The 10-year touched its highest level since July 14 at 1.335% before dipping to 1.330%, up 11.6 basis points on the day.
(Reporting by Fergal Smith; Editing by Nick Zieminski and Peter Cooney)
China Vows Better Policy Support to Economy as Headwinds Mount – BNN
(Bloomberg) — Chinese policy makers reiterated the need to fine-tune economic policies as the world’s second-largest economy faces increasing headwinds from virus outbreaks and high commodity prices.
Policy should be preemptive and coordinated across cycles, the State Council, the equivalent of China’s cabinet, said in a statement after a meeting chaired by Premier Li Keqiang Wednesday. Governments at all levels should maintain the continuity and stability of macroeconomic policies and enhance their effectiveness, while also do a good job in preventing and controlling virus cases, it said.
Efforts are needed to better coordinate fiscal, financial and employment policies in order to “stabilize reasonable expectations by the market,” it said.
China again vowed to make sure the economy is operating within a reasonable range, with further measures to boost consumption, guiding private capital to play a better role in expanding investment, and ensuring stable growth in foreign trade and foreign capital, according to the statement. While the employment situation is stable this year, efforts are still needed to maintain employment and help companies, it said.
The economy took a knock in August from stringent virus controls and tight curbs on property. While China’s Covid zero approach helped to quickly quash the infections, retail sales growth suffered, slowing to 2.5% in August.
Facing the continued commodity boom, the State Council also pledged to use more market-based measures to stabilize commodity prices and ensure supplies of power and natural gas during the winter.
©2021 Bloomberg L.P.
UAE Says It's Unwinding Pandemic Stimulus as Economy Recovers – Bloomberg
The United Arab Emirates has begun winding down an economic support program launched in response to the coronavirus pandemic as the economy shows signs of gradual recovery, the central bank said in a statement.
The reduced reserve requirements for banks won’t change for now and neither will the lower loan-to-value ratio required for first-time home buyers seeking mortgage loans, the bank said. The loan deferral component of the Targeted Economic Support Scheme will expire by the end of 2021 with financial institutions able to carry on tapping a collateralized 50-billion-dirham ($13.6 billion) liquidity facility until the middle of 2022, in line with earlier guidance.
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