Rate hikes confuse already volatile housing market

by Invesbrain Saturday, July 22, 2017
Print This Article

David Madani is among the economists who is perplexed by the July 12 interest rate hike by the Bank of Canada.

The senior Canada economist for Capital Economics and housing market bear thought it was “misguided” for Bank of Canada governor Stephen Poloz to raise interest rates for the first time in seven years. Citing a Canadian economy “still heavily dependent on housing, record household borrowing and consumption to support 90 per cent of GDP growth” Madani opined, with home sales on their way down and a correction in home prices imminent, any easing of monetary policy by the BoC would be short-lived.

Related: Bank of Canada makes a bullish shift

While Poloz did surprise many -- including, for what it’s worth, this space -- by raising the BoC’s benchmark overnight rate by 25 basis points to 0.75%, what shocked Madani was the absence of any mention of Canada’s overheated housing markets, particularly in Vancouver and in the Toronto area.

On June 8, four days before Poloz’s deputy Carolyn Wilkins wrong-footed markets in a speech that saw the BoC suddenly shift to a hawkish stance, the central bank boss took aim at housing prices in a press conference after the bank released its biannual Financial System Review.

“Price increases in Vancouver and Toronto have an element of speculation to them,” Poloz said. “The longer that goes, the bigger it gets, the more you start to be concerned that not necessarily a global recession, but just about anything could be responsible for causing a correction in housing.”

On July 12, the BoC’s policy statement didn’t even refer to housing.

"In some ways the policy statement was quite bizarre, as it made no explicit mention of housing at all. This is perhaps because they aren’t concerned at all, or, more likely, that they are really concerned and don’t want to mention anything right now until it is clearer as to the exact state of the housing market," Madani told BNN after the hike. "We still think, however, that the economy is on the verge of a slowdown due to housing-related weaknesses, which will be reinforced by higher household borrowing costs. As we move through the year, we expect this weakness to become self-evident and this to put the brake on talk of further interest rate hikes."
Before the July 12 hike, Madani said raising rate at “this very late stage in the housing cycle” would be on part with the European Central Bank’s 2011 decision to hike rates twice in the teeth of the Eurozone crisis and harsh austerity measures.

The move by the ECB president Jean-Claude Trichet, according to the New Yorker, exacerbated the debt crisis facing the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) and sucked the wind out of bloc’s economic recovery.

Canada’s recent rate hikes come, as Madani points out, with more macroprudential measures set to tighten Canada’s housing markets, on top of measures put in place by the federal government as well as B.C. and Ontario.  

On July 6, according to Bloomberg and the Financial Post, the Office of the Superintendent of Financial Institutions announced it is mulling three measures “targeting over-leveraged borrowers in the uninsured mortage market.”

That market comprises half of the $1.5 trillion mortgages outstanding in Canada. OFSI’s measures include: “asking lenders to stress test uninsured mortgages, or those borrowers who put at least a 20 per cent down payment, and matching the loan-to-value ratios, or the loan amount compared to how much the house is appraised at, with local market conditions.”

The Post noted the OSFI move would squeeze the alternative lending market or the so-called “shadow banking sector” which has been roiled by troubles at Ontario’s Home Capital. Royal Bank analysts wrote in a July 9 note that the measures could mean “residential mortgage debt growth would slow to as little as 2 per cent each year from 6.3 per cent now.”

Related: Housing correction would hit specialty banks the hardest: DBRS

Still speeding

Yet despite slowdowns in sales, Canadian home prices, powered by Toronto and Hamilton, posted record increase in June, according to the Globe and Mail.

The Teranet-National Bank Composite House Price Index, showed prices increased 2.6% from May, the largest increase for June in the 19-year history of the index and a record 17th consecutive month a increase was posted.

Related: Housing start solid, at least for now

Hamilton led the way at 4.1%, followed by Toronto at 3.7% as prices rose in 10 out of 11 markets in the index. Toronto home prices increased 29.3% year over year; Hamilton went up 25.6%.

Vancouver saw also saw prices rise from May to 2.5%.

John Pasalis of Realosophy Realty said rising rates may actually stoke housing markets to greater heights.

“The psychological effects of this rate increase might counterintuitively have a positive effect on the real estate market,” he told BNN. “If buyers believe interest rates will increase even further in the near future, some of those sitting on the sidelines watching the cooling market with uncertainty may get back into the hunt.
“The big unknown is whether the fear of future interest rate hikes will outweigh fears about buying into a market that has seen prices trending down over the past three months. No one wants to buy now if they think prices will fall further.”

Home Sales End Year on Historically Low Note

Last year was a tumultuous one for Canadian real estate, culminating in one of the slowest Decembers on recent record for sales activity. According to the latest analysis from the Canadian Real Estate Association, the number of homes changing hands came in 12% below the 10-year a...

Canadian home sales fall further in December

Ottawa, ON, January 15, 2019 – Statistics released today by the Canadian Real Estate Association (CREA) show national home sales posted a fourth-straight monthly decline in December 2018. Highlights: National home sales fell 2.5% from November to December. Actual (not season...

Slate continues Calgary buying spree: Adds four more properties

The Life Plaza in downtown Calgary is now owned by Slate Asset Management. (Google Street View image) Slate Asset Management‘s Calgary buying spree continues, with the company adding four more properties to its portfolio late in 2018, RENX has learned. Two of the acquisition...

Canadian CRE investment to remain strong in 2019: Morguard

Morguard’s office property at 123 Commerce Valley Drive East in Thornhill, Ont. (Image courtesy Morguard) The appetite for Canadian commercial real estate assets steadily increased in 2018 and it appears that mentality is not going to change much in 2019, according to a repo...

Canadian real estate expected to show strong performance in 2019 and 2020: LaSalle

The Canadian and U.S. real estate markets are expected to show strong performance in 2019 and into 2020, according to a new report by LaSalle ......

U.S. investors form JV, buy nine Ontario seniors residences

Maple View Terrace in London, which has been acquired by Oxford Living LLC. (Google Street View image) Two U.S.-based investors have created a partnership to buy nine Ontario seniors housing communities in small or mid-sized markets and create a new platform to be known as Oxf...

RENX Top 30 real estate stories of 2018

The Bay Adelaide Centre in Toronto will get its third tower. (Image courtesy Brookfield) As we approach the end of 2018, it’s time to look back on another extremely busy year in Canadian real estate. That means it’s time for the RENX Top 30 real estate stories of 2018 News...


We’ll get to the latest dreary Canadian real estate update in a moment. Seems when central banks take the cheap-money punch bowl away, everything turns to crap. First a reality check on what we’ve done to ourselves – in a sparsely-populated country where the average house...

Canadian home sales activity softens further in November

Ottawa, ON, December 17, 2018 – Statistics released today by the Canadian Real Estate Association (CREA) show national home sales posted another monthly decline in November 2018. Highlights: National home sales fell 2.3% from October to November. Actual (not seasonally adjust...