Market conditions affect mortgage rate

The Bank of Canada’s one-half point cut in the overnight lending rate on March 4 resulted in financial institutions lowering mortgage rates. But the trend may not be sustainable, since the credit market has tightened up due to the sub-prime mortgage crisis in the U.S. 

“The re-pricing of risk has meant higher costs to raise capital in credit markets,” according to the British Columbia Real Estate Association’s (BCREA) December 2007 mortgage update. “This includes monies funding part of the mortgage loan market. Higher costs of capital on the part of some lenders have been passed on to buyers through higher mortgage rates, explaining the rate bump in October, despite lower bond yields.”  

In December, BCREA economist Cameron Muir correctly predicted the Bank of Canada would move to lower interest rates in the New Year and called for a modest drop in mortgage rates in the first half of 2008. 

With lower growth projections now forecast for the Canadian economy, mortgage rates probably won’t rise any higher. With Winnipeg having the most affordable housing in the country, home buyers will not be discouraged to buy into a market where prices are expected to increase for the sixth year in a row.

The WinnipegREALTORS® forecast for the first two months of 2008 is very close to the mark in terms of MLS® sales being on par with last year, while dollar volume continues to rise in low double-digit percentages. It is a replay of the last few years where unprecedented demand is partially due to increased immigration and decreased outmigration which has been putting pressure on the existing resale housing market. 

Rental properties continue to be in short supply or almost nonexistent in some areas of the city. 

New developments are coming on stream, but that is not enough to meet the needs of all home buyers.

Winnipeg’s housing market is still underpinned by strong economic fundamentals, but the ongoing challenge this year is how to handle the prevailing demand. The continuing demand for existing resale homes is shown by the year-to-date statistics which reveal that 63 per cent of homes listed on MLS® have sold at or above list price.  In comparison for the first two months in 2007, the percentage then was historically high at 50 per cent but noticebly lower than this year. 

Current MLS® listings entered in the first two months are slightly ahead of 2007 but that is small consolation when considering it’s a very active marketplace. 

WinnipegREALTORS® is not alone in having to deal with a best-year-ever housing market. A recent article in the Winnipeg Free Press by Murray McNeill reported that the home renovation market is also booming. Statistics Canada numbers indicate Manitoba homeowners put over $1 billion into home improvement projects in 2007.

“We’re already booking six months ahead as we speak and we don’t have  any reason to believe it’s going to slow,” said Brian Contant, president and  owner of Character Homes, a past chair of the Manitoba Home Builders’ Association and the MHBA — Renovators Council. 

“Even before these stats came out, I would have said it’s going to be as busy or busier,” said Ralph  Oswald, the Renovators Council’s current chair.

Bank rate cut again in March

The Bank of Canada cut its benchmark overnight lending rate by one-half of one percentage point to 3 1/2 per cent on March 4  and signaled the likelihood of further cuts in the near future. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, now stands at 3.75 per cent.

“There are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected,” warned the bank, adding, “deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy. 

“These developments suggest that important downside risks to Canada's economic outlook ... are materializing and, in some respects, intensifying,” the bank cautioned.

The bank repeated earlier statements that the domestic economy remains strong, while a high Canadian dollar and weakening U.S. economic growth is hurting exports.

“Our high dollar is keeping inflation in check, so the Bank of Canada is cutting its trend-setting bank rate to boost economic growth,” said CREA chief economist Gregory Klump. “Financial market turmoil will remain a downside risk to economic growth for some time, and the bank all but said it will continue lowering interest rates.”

When the bank decided to lower interest rates on March 4, the advertised five-year conventional mortgage rate stood at 7.29 per cent. This is less than one per cent above where it stood at the beginning of last year.

Competition among mortgage lenders remains stiff, which continues to help many borrowers negotiate discounts from advertised rates. However, fallout from the U.S. sub-prime mortgage debacle has tightened credit conditions in financial markets, resulting in smaller discounts off advertised mortgage interest rates.

Declining interest rates and a rebound in economic growth are factored into the CREA MLS® 2008 market forecast, to be issued later this month. 

“Sales activity will stay strong and reach the second highest level on record this year,” Klump added. “Prices are also forecast to continue rising. Additional cuts to mortgage interest rates are good news for housing affordability and Canadian housing demand.”