It has now been a week since the mortgage insurance rules changed. There has been lots of speculation from a number of banks and other economists over the last several days as to the impact that is forecast. For example, the TD Bank economists forecast
that average home prices in Canada will likely contract 10 to 15 per cent over the next two years.
Incredibly, we still see articles quoted from a week prior to this with extremely optimistic numbers based on the conditions prior to the mortgage insurance rules change. These folks are either extreme optimists or they have their heads in the sand.
What Will the Local Effect Be?
The Corporate Economics department at the City of Calgary
has now come out with a report
with a significantly more local focus. As a result of their prior research and adjustments, their forecast is:
The Calgary housing market has two active sectors, entry-level and move-up level.
Low priced entry-level housing will be affected most by this mortgage rule change. We anticipate a price drop in the below $300,000 market of about 8% as a result of this mortgage rule change.
Houses valued at or above $450,000 should experience little downward pressure while houses priced over $700,000 will experience none.
We anticipate it will take the construction market about 18 months to adjust to the new rules. By the end of 2013 we anticipate about 200 more units of multi / condo units will be produced than previously expected with about the same number of single family homes as prior (albeit smaller more austere single family).
A faster growing job market in Calgary and Alberta should lessen the impacts of this policy on the local economy.
So What Does this Mean to You?
These impacts are after adjusting for the large anticipated increases in population from in-migration due to our local and regional economic activity. The report indicates that if there is faster job growth than what they forecast, then the effects should be lessened.
The entry-level housing product affects the entire housing chain. Homeowners of entry-level housing typically move up and become move-up buyers of the homes priced between $300,000 and $450,000. These in turn move up to the homes in the "over $450,000" price range.
Based on their forecast, it could be concluded that a significant number of the people migrating to the city are going to buy in the over $450,000 range to dampen the effect in that range and above. This in turn, will bring a large spin-off in positive consumer spending as people buying in this price range likely will bring families or dual-income households.
Combined with the entry-level homes falling in value, Calgary should see a significant amount of money being spent on renovations in the "below $300,000" price range in the next 24 months with people renovating and fixing up their homes, or just finishing basements. Many won't likely be able to sell to move up to larger homes. This brings more positive spin-offs for the city.
The crazy thing that we'll likely hear in the next several months is that the "average sale price" will be increasing. Why? With fewer homes priced below the $300,000 price point selling, the averages will be skewed upward as we always see when there are just a few additional homes sold above the $2,000,000 price point.
If the economic crises in Europe impacts the world economy more significantly, we could see less local economic activity. This, in turn, would magnify the effects of the mortgage changes. However, if this were to happen, other financial and economic policies would almost certainly be implemented.