Bank of Canada -interest rates fueling Housing Boom & Renovations

Toronto- Canada Housing Boom fueled by low interest rates- Credit

Canada's households just keep on borrowing, taking advantage of low interest rates to buy new houses, build new decks and make myriad other purchases.

Bank loans to Canadian consumers rose almost 10 per cent in June compared with the same month a year earlier. But while policy makers in some countries are worried that rampant lending may be creating more bubbles, analysts and most bankers expect loan growth to cool in Canada in coming months. "Given where mortgage rates are, if you didn't have housing demand you'd be worried," said Robert Sedran, financial services analyst at National Bank of Canada.

"That said, we certainly do have expectations of loan growth slowing from here."
The home-buying binge that is driving new mortgages while rates are low is likely to abate as demand is sated, analysts at Toronto-Dominion Bank argue. In June, "potential home buyers were purchasing homes now rather than later," TD's economists wrote.

On top of that, federal tax credits that encourage home renovation come to an end in early 2010, which may slow borrowing for all those new kitchens and bathrooms.

Businesses, by contrast, are already slowing their borrowing. Loans to businesses rose only 1.1 per cent in June compared with June, 2008, as companies cut back on using credit as they sideline expansions, and as bankers reduce the amount they are willing to hand out in a recession.

Banks are also facing more competition from a resurgent bond market, where companies can also borrow.

"While bank credit filled the financing gap during the credit crunch and early stages of the recession, we expect bank business credit to contract over the coming months, owing to these demand-side factors," TD said.

Analysts add that banks are also likely to face headwinds as interest rates rise, squeezing their margins on loans, and as cheap sources of financing introduced by governments during the credit crisis are withdrawn.