Canada’s housing market is starting to show signs of positive momentum again, but the Bank of Canada has bigger fish to fry.
On Oct. 23, the central bank dropped its bias toward higher interest rates due to a subdued inflation outlook and an increasing output gap. The hint that the next move in rates would be higher served as a deterrent, albeit mild, to the growth of household credit and the associated risks to financial stability in the country.
The bank did acknowledge the strengthening housing market, writing in its Oct. 23 press release, “The Bank must also take into consideration the risk of exacerbating already-elevated household imbalances.”
In fact, the Oct. 23 release was the first this year to not use the phrase “constructive evolution of household imbalances.”
Instead, the central bank was a bit more specific, saying, “While household spending remains solid, slower growth of household credit and higher mortgage interest rates point to a gradual unwinding of household imbalances.”
The growth in household credit has financial stability implications, but the latest readings, according to the Royal Bank of Canada’s economic research, are benign. In RBC’s October 2013 analysis, household credit increased 3.9 percent on a year-over-year basis in September.
To put this in perspective, Bank of Montreal, in a feature story, described residential mortgage and consumer credit growing at the “slowest clip in 18 years—keeping better pace with personal income.”
Taking a step back and looking at changes in home prices since the first quarter of 2008, Canada appears to be one of the most overvalued housing markets in the world, according to the Organisation for Economic Co-operation and Development. This is based on elevated price-to-rent and price-to-income ratios.
When combined with Canada’s elevated current account deficit as a percent of gross domestic product, one can see where the concern for policymakers lies.
However, the latest reading from Canada’s central bank is that the next direction for interest rates is not necessarily higher anymore.
BMO argues that the Bank of Canada believes “the recent heating up of the housing market is a temporary phenomenon.” Should it not prove to be the case, expect the government to again act on the policy front with stricter mortgage insurance/lending rules, according to BMO.
But again the argument for the strength in the housing market is thought to be the response by potential homebuyers to the rise in mortgage rates seen in the early part of the summer.
Potential homebuyers supposedly locked in lower mortgage rates before they rose further, which has served to bring forward home sales from later in the year. The corollary to this is that housing sales (strength) should fade in the next few months.
With the Bank of Canada signalling that rates could move lower just as easily as they could move higher, the real estate market will have to adjust its long-established thinking of being preoccupied with when rates will begin to rise.
