Rising loonie

(March 15, 2005) The soaring Canadian dollar may be a drag on the economy as a whole, but it’s been a boon to the country’s real estate market, according to a new report from CIBC World Markets.

The dramatic appreciation of the loonie over the past two years has meant the Bank of Canada has kept interest rates at historic lows, leading to cheap credit, “the lifeblood of the housing market,” says CIBC World Markets senior economist Benjamin Tal.

CIBC estimates that five-year mortgage rates would be around 7%, if not for the dollar’s gain. Currently, the big banks offer a five-year fixed rate of around 6%, with other suppliers going below the 5% mark.

The combination of low interest rates and increasing home prices allowed Canadian homeowners to withdraw a record $21 billion from their home equity and save $3 billion in mortgage interest payments last year, the report estimates.

“The strong dollar and its stabilizing impact on mortgage rates have helped boost real estate prices by an additional 9% in 2004,” says Tal. “Without the dollar’s appreciation, house prices would likely have risen by only a fraction of that pace and we would probably have seen much slower housing starts and re-sale activity in the second half of 2004.”

The report, called Loonie Boom: How the soaring dollar is sustaining the Canadian housing market reveals that that no less than one-third of mortgage holders refinanced last year. Cumulatively, home equity withdrawals (including refinancing, increasing mortgage amounts with renegotiation, and home equity loans) totalled $55 billion over the past three years.

Much of that borrowed cash is finding its way back home, with spending on renovations estimated at $28 billion in 2004, rising to a projected $30 billion this year.

Lower interest payments due to mortgage refinancing saved the average household nearly $1,900 last year, the equivalent of a 3% increase in average household income. And there’s still room for that number to grow. CIBC says that 20% of current mortgage holders can still renegotiate their mortgages profitably.

Canadians have proven to be “highly responsive” to lower interest rates, Tal says, and the real estate market will reap the benefits of cheap credit for at least the remainder of 2005.

(03/15/05)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.