The Bank of Canada (BoC) made its final Prime Rate Announcement of 2016 on Wednesday, December 07, 2016 and it’s no surprise that the BoC is maintaining its target for the Overnight Rate at 0.5%.
Economic data suggest that although the global economy has strengthened, uncertainty continues and is damaging business confidence and dampening investment in Canada’s major trading partners. Following the Trump victory, there has been a rapid back-up in global bond yields, partly reflecting market anticipation of fiscal expansion in a US economy that is near full capacity. Canadian yields have risen significantly in this context.
However, it is not good for Canadian housing. Mortgage rates have already risen in Canada in the past month and more is likely to come as potential homebuyers are already struggling with more stringent qualifying criteria and particularly non-bank lenders are confronted with new mortgage insurance rules.
Canadian Housing Market Slowdown
The BoC highlighted that household debt ratios will continue to rise, but these will be mitigated over time by the announced changes to housing finance rules. Even before the unanticipated rise in mortgage rates in October, the Bank revised down its economic forecast in large measure because of the federal government’s new initiatives “to promote stability in Canada’s housing market”. The BoC reported that these measures are “likely to restrain residential investment while dampening household vulnerabilities.”
According to the October Monetary Policy Report, the housing initiatives were expected to dampen 2016 GDP growth by 10 basis points and by 30 basis points next year. Government sources say they expect the growth in housing resales to decline by 8% in 2017 from the forecasted 6% growth pace this year. Private estimates of the negative impact of the new housing measures on overall economic growth vary, but most expect the contractionary effect to be roughly a 30-to-50 basis point reduction in growth over the next twelve months. Given that baseline potential growth is less than 2%, this is a very material dampener.
Even before the mortgage rate hikes, we have seen housing resales slow significantly in Vancouver and the surrounding region. Particularly in the single-family sector, resales and prices have fallen. This has been attributed to the August introduction of a new 15% land transfer tax on non-resident purchasers. Anecdotal evidence suggests that foreign buyers have shifted their sights to some US cities, notably Seattle, as well as Toronto and Montreal, but it is too early to have any hard data. Indeed, CMHC recently reported that foreign ownership of Canadian real estate is less than 3% nationwide and only as high as 5% in Vancouver and somewhat less in Toronto Central.
For the full rate announcement, please click here.
Based on this recent announcement, and the anticipation that the Prime Rate will still remain low for at least until the beginning of 2017. Fixed interest rates have risen approximately 0.25% in the last quarter and we anticipate further rate increases in the new year. The next scheduled date for announcing the overnight rate target from BoC is January 18, 2016.
For the 2017 Prime Rate announcement schedule from the BoC, please click here.
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Dr. S Cooper, “Bank on Hold as Housing Expected to Slow,” Sherry Cooper, accessed December 7, 2016, http://sherrycooper.com/articles/bank-hold-housing-expected-slow/.
