Bank of Canada Interest Rate Increase and Stabilizing House Price Index… What’s in Store for the Canadian Real Estate Market?
On July 11, 2018 news broke of a Bank of Canada interest rate increase to 1.5% — the highest interest rates have been since December of 2008.
Then, on July 12, 2018, the Teranet-National Bank House Price Index came out showing that house prices are making up lost ground in the second half of 2017.
While unrelated, both announcements share a commonality: they indicate what could be on the horizon for the Canadian housing market.
In its July 11 announcement, the Bank of Canada (BOC) referenced Canadian housing trends.
The BOC stated that household spending is being dampened by higher interest rates and tighter mortgage lending guidelines. It referenced recent data suggesting housing markets are beginning to stabilize following a weak start to 2018.
The following day, the House Price Index released, showing the same stabilization. The composite index in June 2018 was up 0.9% from May 2018, indicating that some of the ground lost in the second half of 2017 is being recovered.
However, even though the numbers are showing recovery, the index increase is still weak for this time of the year. According to the June 2018 report, written by National Bank of Canada senior economist Marc Pinsonneault, if the Index were purged from seasonal patterns, it would have been flat over the past three months.
Different types of dwellings are also affecting the Index. For instance, condo prices have risen rapidly in Toronto and Vancouver since the beginning of 2018 (after seasonal adjustment, up 7.8% and 16.3% annualized respectively).
Prices for other types of dwellings have held their ground, which could be reassuring in the wake of higher interest rates and stricter mortgage rules, such as the B20 lending guidelines.
In summary, the good news is that:
- Canadian household debt levels are going down. This is also good for lenders who are stress testing mortgages and looking at other components, such as the Gross Debt Service Ratio (GDS) – the amount of total housing-related debt a person carries – and the Total Debt Service Ratio (TDS) – amount of total debt a person carries.
- Even as interest rates rise, and mortgage regulations become stricter, house prices for more traditional dwelling types are holding steady.
- Condo prices are still on the rise, indicating that they continue to be a popular and affordable.
- While not at a record high, the House Price Index has shown stabilization. Only time will tell if this trend continues, but many economists are predicting it will.
The next BOC rate announcement is set for September 5, 2018. It is appears unlikely, however not impossible, for there to be another increase at that. The Royal Bank of Canada predicted in July of 2018 that the BOC will continue to raise interest rates to 2.25% by the first half of 2019, but growing household income will provide some offset.
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Even as uncertainty remains, our real estate technology will help you stay agile and provide your clients with their best options.
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