Never before has the housing market contributed so much to economic growth
Jan 2006
CIBC World Markets Senior Economist Benjamin Tal analyzes economic developments and forecasts interest rates and the housing market.
Bubble or no bubble? Most economists keep reassuring nervous households that this time around the fundamentals of the housing market are much healthier than they were 15 years ago. That might be true, but even a soft landing in the housing market won¹t be gentle on the economy.
Never before have we seen the housing market contributing so much to overall economic growth. Refinancing activity is at a record-high with 60% of all Canadian mortgages negotiated over the past two years. Borrowing against home equity rose by a record 25% last year, adding close to $30 billion in cash to consumer wallets. This ³housing wealth effect² has led to $25 billion in extra spending over the past 3 years. We estimate that these spin-off benefits from the booming housing market have added well over half a percentage point to overall GDP growth in the past 12 months.
The problem is that a leveling-off housing market means these benefits will not be available in 2006. Residential real estate investment is very close to its ³resistance² level of just over 7% of GDP, housing starts are now falling, and MLS resale activity during 2005 rose by less than 5%.
Even though the Bank of Canada believes the economy is close to full capacity raise rates dramatically, since the economy is already being slowed by the leveling-off housing market, strong dollar and high energy prices.
We therefore expect the Bank of Canada to continue moderate rate increases totaling 0.5% to 0.75% over the coming 6 to 8 months. While variable rate mortgages currently account for close to 40% of new mortgages, rising short term rates make the 5-year rate very attractive. So we believe variable rate mortgages will fall to just 25% of total new mortgages in 2006 and 2007.
