Canadian Mortgage Trends – November 25, 2011

Four prominent economists met on a CAAMP panel Monday:

Avery Shenfeld (CIBC), Warren Jestin (Scotiabank), Stefane Marion (National Bank Financial) and Carlos Leitao (Laurentian Bank).

The eurozone crisis, employment, rates and CMHC were the topics of the day. Here’s what they expressed about each:

On Interest Rates

“It is not normal to have 2% inflation and a 1% overnight rate,” said Marion. Rates will normalize. “Do not sell (mortgages, especially shorter or variable-rate terms) to clients who may not be able to afford higher rates.”
“Prime should be the norm for variable rates.”—Leitao

Regarding rate cuts, we “can’t rule it out,” said Shenfeld.
The BoC suggests rates will stay low “for a long period of time.”—Jestin
Central banks will give inflation a longer leash (before raising rates), noted Leitao.
Despite a conditional commitment to keep rates low until mid-2013, “Don’t trust the Fed too much,” Marion advised. The Fed cannot “keep a promise on the long end of the curve” so we “can’t be too complacent.”

On Housing

The housing market is strong because rates are “at extraordinary levels,” said Jestin. “What worries me is that we’re at record levels of home ownership.”
There will come a point when rates will go up and house prices will come down, said Shenfeld. He warned: Watch out for more 5%+ annual price run-ups because “the bigger they are the harder they’ll fall.”
“Every other week OSFI is stress testing banks for falling house prices.”—Marion
If people continue to be qualified by reasonable standards then there is no housing bubble, declared Leitao.
Employment is Jestin’s #1 indicator for measuring the health of the housing market.
“I don’t pay attention to one month’s numbers on employment,” said Shenfeld. He added: Slow employment will lead to slow mortgage growth.
The “higher house prices go, the bigger mortgage [that] people need,” said Shenfeld. If prices level off it will impact originations.

On the European Crisis

“This is the first time we’ve face a sovereign global debt crisis.”—Marion.
Do you want to know if Europe is going to “blow up?” Watch the Italian 10-year yield says Shenfeld. The higher it goes, the worse the crisis gets.
Unlike European banks, there are “no liquidity issues” among Canadian banks, stated Jestin.
Shenfeld said that the mess in the rest of the world and a strong loonie have “to some extent been a friend of the mortgage consumer” (because of their depressing effect on rates). Yet, there is a point at which low rates are old news. Canadians have now started to say, “Maybe I’ve borrowed enough.”


CMHC might be worried about cities with big price run-ups (like the GTA and GVA). “Ottawa may adjust CMHC’s risk regionally,” speculated Shenfeld.
“Competition in the mortgage insurance market is not a bad thing,” said Laitao, adding that private default insurers add value in various ways.