Canada's housing market is akin to a snowball gaining in size as it rolls downhill pushed by ongoing low mortgage rates, but it's not in red flag territory.
The strengthening trend in the monthly indicators of housing starts, home sales, and house prices is clear. The overall housing market has defied forecasts and expectations of a cooling off from several months ago. These expectations are being pushed further into the future.
The culprit, of course, is mortgage rates.
The five-year fixed-rate mortgage, the most popular type of mortgage in Canada, tracks reasonably well the five-year federal government bond yield. So looking at how five-year bond yields have evolved in 2014 can shed light on what has happened with mortgage rates.
As Canada's economy tends to be heavily influenced by the U.S., its five-year bond yield has tended to track its U.S. counterpart, which nosedived at the start of the year due to the polar vortex's effect on economic growth. U.S. GDP shrank in the first quarter by -2.9 percent.
The best rate on a five-year mortgage, according to data from the National Bank, has come down from roughly 3.70 percent at its peak in early 2014 to 3.00 percent, which is very close to the lows of 2013.
Effects of Low Mortgage Rates
July housing starts beat market expectations of 190K, coming in at 200.1K, as reported by the Canada Mortgage and Housing Corp. (CMHC) on Aug. 11.
"The current strength in Canadian housing starts seems to be a catch-up from a weather-related trough last March," wrote National Bank analyst Marc Pinsonneault.
At 200.1K, it is above its six-month moving average and is at the highest level since October 2013. In late 2013, housing starts were coming in below their six-month moving average.
The Canadian Real Estate Association (CREA) reported on Aug. 15 that existing home sales reached their highest level since March 2010 after a sixth consecutive month of increases.
In comparison with 2013, CREA notes, "For the year-to-date, sales activity is up 4.7 percent compared to the first seven months of 2013." Sales activity slumped in the last quarter of 2013 and first quarter of 2014, which illustrates the strength of the recent sales activity.
"Low mortgage interest rates continue to bolster home sales activity," said CREA's chief economist Gregory Klump in a press release. Home sales and mortgage rates have exemplified that classic inverse relationship since late last year.
Year over year, home prices have gone up roughly 5 percent nationally, according to the Teranet-National Bank house price index (4.9 percent) and the Multiple Listing Service home price index (5.3 percent).
The monthly house price change as measured by Statistics Canada's new housing price index in the first six months of this year are more than double (averaging 0.18 percent a month) that of the last six months of 2013 (averaging 0.08 percent a month).
The CREA reported that the actual (not seasonally adjusted) national average price for houses sold in July 2014 was $401,585, but when excluding the pricy cities of Toronto and Vancouver, that figure is $327,988, and the year-over-year increase is closer to 4 percent.
The CMHC, which provided its third-quarter outlook based on data available in mid-July, forecasts that home prices and sales will keep rising this year and into 2015. It also predicts housing starts will drift lower over this same period of time. Prices are forecast to rise 4.5 percent in 2014, but only 1.8 percent in 2015.
"While mortgage rates are currently at historic lows, the consensus forecast is that rates are forecast to increase in the latter half of 2015, which will have a dampening impact on housing demand," according to CMHC.
Both CREA and CMHC agree the housing market is still in balanced territory.
Just before his policy retreat in Wakefield, Quebec, on Aug. 12, Finance Minister Joe Oliver said he is "not alarmed by what we see" when asked about the housing market. He does seem to be less preoccupied with the real estate market than his predecessor, the late Jim Flaherty.
In addition, the Bank of Canada, based on statements made at its mid-July rate-setting meeting, expects the housing market to head toward a soft landing as household finances continue to stabilize, although it noted debt levels are still very high.
The CMHC's housing outlook also expects moderation leading to a soft landing. The improvement in the Canadian economy (income growth) supported by a high level of immigration bodes well for the housing sector.