Outlook for Residential Mortgage Lending


September 30, 2010 by Admin

As was discussed in the prior section, through much of this decade rapid growth in the Canadian mortgage market has been driven by a very strong housing market. Housing demand, in turn, benefited from a combination of low interest rates and strong job creation.

Many indicators are available for characterizing the economic situation. In terms of drivers of housing markets and mortgage demand, employment is the most powerful. This analyst finds that a useful indicator is the percentage of the (adult) population that is employed (or the “employment rate”). The data shows that prior to the recession of 2008/2009, the Canadian economy was as strong as it has ever been, with the employment rate at record levels. This certainly goes a long way to explaining the record levels of housing activity, rapid growth of housing values, and strong mortgage demand.

Moreover, according to this indicator, the recession was less severe than the two prior recessions and was relatively short-lived: this time the employment rate fell by about 2.5 percentage points. In the two prior recessions the drops were about twice as large. This downturn had a short duration in Canada – about nine months.

The employment rate has now started to increase, which means that employment is growing more rapidly than the population, which is a very encouraging event. Moreover, while the employment rate remains below the pre-recession level, it is quite high in historic terms.

In addition, interest rates are at very low levels – at all-time lows for fixed rate mortgages, and only slightly above all-time lows variable rate mortgages.

This combination of a recovering, relatively healthy job situation plus very low interest rates has allowed housing markets and mortgage demand to recover quite robustly from the recession.

In fact, the housing market recovery was stronger than we might have expected.