- CIBC report cites soaring loonie as primary factor sustaining the Canadian housing market -
TORONTO, March 15 /CNW/ - The appreciation of the Canadian dollar has produced a welcome side effect for Canadian homeowners - keeping mortgage rates low and spurring an increase in home values. This combination of factors allowed Canadian homeowners to withdraw a record-high $21 billion from their home equity and save $3 billion in mortgage interest payments in 2004, according to Loonie Boom: How the soaring dollar is sustaining the Canadian housing market, a CIBC economic report released today. Much of this money found its way back into the economy last year through an increase in spending thanks to the continuing home renovations boom, the "housing wealth effect" and the "housing multiplier effect".
"The strong dollar and its stabilizing impact on mortgage rates have helped boost record-high real estate prices by an additional 9 per cent in 2004," said Benjamin Tal, Senior Economist, CIBC World Markets. "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 resale activity in the second half of 2004."
The report outlines several spin-offs from the combination of the Canadian dollar keeping interest rates low and the subsequent increase in home values, including:
1) Home equity withdrawals, which include refinancing, or increasing mortgage amounts upon renegotiation, and new home equity loans. One in four homeowners who renegotiated their mortgage in 2004 also increased their mortgage amount by an average of $30,000, or almost half of the average annual household income. The report estimates that home equity withdrawals in Canada amounted to $21 billion last year. Cumulatively, over the past three years, home equity withdrawals sum to $55 billion, which is equivalent to more than 11 per cent of the growth in total Canadian GDP during this period.
2) The home renovations boom, through which much of the cash borrowed against home equity is finding its way back home. One-third of all the funds available to homeowners in 2004 through the combination of cash out mortgage refinancing and home equity loans was used to finance home renovations. Spending on home renovations totalled a record high of $28 billion in 2004 and is projected to rise to $30 billion in 2005.
3) The "housing wealth effect", which is the current phenomenon of Canadian homeowners feeling richer and spending accordingly. Using the Bank of Canada's estimates, consumers spend 5.7 cents out of every dollar increase in the value of their homes. Compliments of the rising dollar, the appreciation in house prices in 2004 and the associated housing wealth effect has led to a record high of more than $7 billion of extra spending last year. In the past three years, homeowners have generated a cumulative $21 billion in additional household spending, contributing more than 20 per cent to the total increase in consumer spending during this period.
4) The "housing multiplier effect", or the impact of each home purchase generating, on average, $7,500 in terms of move-related new spending, such as home inspection fees, legal fees and moving costs. This "housing multiplier effect" amounted to close to $10 billion in extra spending by homeowners over the past three years.
5) Interest payment savings, which is putting millions of dollars in the pockets of Canadian homeowners who are obtaining new mortgages at very low rates and renegotiating their existing mortgages to reduce their rates. A whopping 60 per cent of all Canadian mortgages were negotiated in the past two years. Lower interest payments due to renegotiations saved the average household close to $1,900 in mortgage interest payments in 2004 - the equivalent of a 3 per cent increase in average household income, and roughly 10 per cent of the annual carrying cost of a home. Lower income Canadians who renegotiated their mortgages in 2004 saw even a larger benefit relative to their income, generating annual savings equivalent to no less than an 8 per cent pay increase.
"By renegotiating their mortgages last year, Canadian homeowners saved a total of $3 billion in interest payments - and this figure swells to a cumulative $10 billion in mortgage interest savings over the past three years," said Tal. "Given recent trends in interest rates, an estimated 20 per cent of current mortgage holders can still renegotiate their mortgages profitably."
For the balance of 2005, the report predicts that the real estate market will continue to benefit from already low and potentially lower mortgage rates. The pace of mortgage renegotiation activity is also expected to remain steady and borrowing against home equity will likely finance another record- year in home renovations.
For a copy of the full report, please visit www.cibc.com/ca/loonieboom or http://research.cibcwm.com/economic_public/download/cwcda-032005.pdf.
CIBC is the second largest residential mortgage provider in Canada, with $86 billion in single-family residential mortgages under administration. The CIBC Better than Prime Mortgage is one of the most popular mortgages in Canada, with a no-haggle interest rate that helps thousands of CIBC customers save money and make their dream home a reality. To find other news releases and information about CIBC, visit the bank's Press Centre at www.cibc.com.
/For further information: Benjamin Tal, Senior Economist, CIBC World Markets at (416) 956-3698, benjamin.tal(at)cibc.ca; or Rina Cortese, CIBC at (416) 980-7458, rina.cortese(at)cibc.com; Archived images on this organization are available through CNW Photo Archive at http://photos.newswire.ca. Images are free to members of media./
