Is the Toronto Real Estate Market About to Catch the U.S. Flu?
All major Canadian banks cut their prime lending rate by 50 basis points yesterday after the Bank of Canada slashed its main rate by half a percentage point and warned that a serious economic slowdown was only just beginning and that Canada faces a tough two years.
“A troubled U.S. economy has hit exports hard, and undermined business and consumer confidence, the bank said”. Yale University economist Robert Shiller, who long predicted the housing market bubble, cautioned that the slump in the U.S. housing market could cause prices to fall more than they did in the Great Depression and bailouts will be needed so millions don’t lose their homes.
Shiller who pioneered the widely watched Standard & Poor’s/Case-Shiller home price index, said there’s a good chance housing prices will fall further than the 30 per cent drop in the historic depression of the 1930s. In the United States home prices have already 15 per cent since their peak in 2006, he said.
What has been driving soaring house prices in Canada in recent years?
According to Craig Alexander at Toronto-Dominion Bank, “The reason we think the market has been staying hotter much longer than anyone anticipated was because of these newer amortization mortgages.” Ottawa extended the maximum amortization period to up to 40 years from 25 years in 2006. That same year, Canada Mortgage and Housing Corporation began providing insurance to lenders for interest-only mortgages.
Nearly two-thirds of buyers in major Canadian cities have chosen extended amortization periods of up to 40 years. In regional markets across Canada, 38 per cent of homebuyers put little or no money down.
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