Home Ownership

Lead up to Bank of Canada’s possible rate hike is like waiting for a summer concert line-up

Today's Bank of Canada rate decision has become one of the most-anticipated financial events of the quarter and with good reason. The announcement will set the tone for business and real estate transactions over the next few months

Today’s announcement by the Bank of Canada — regarding a possible overnight interest rate increase — is quite possibly the most anticipated public policy announcement of the summer. It isn’t sexy, not like a Molson Park or PNE concert line-up announcement that music-lovers anxiously wait for each year. But today’s BoC’s decision on what to do with the overnight interest rate is integral and helps set the tone for the country’s real estate markets (and overall economy) for the rest of the year.

Most analysts still expect a tick up in rates, today

The expectations of a rate increase are high. Very high. But the near-certainty of a rate increase dwindled over the last few weeks, primarily because of President Donald Trump’s ongoing tariff war policies and rhetoric. Last week, BoC’s Governor, Stephen Poloz spoke to a business audience in Victoria, B.C. During his speech, he clearly stated that the escalating cross-border trade fight combined with the strong effect of the most recent mortgage rule changes will “figure prominently” into today’s interest-rate decision.

The slower Canadian economy, due to reduced real estate activity and U.S. steel and aluminium tariffs, means that many analysts are pausing long enough to consider whether or not the nation’s central bank will hold-off once more on a slight rate increase.

Pause, but not stop. Most analysts are still expecting that the BoC will announce a 25-basis point increase to its overnight rate, today. This will bring the Bank’s overnight rate up to 1.50%.

Part of the reason for this continued expectation over a rate increase is that Canada doesn’t operate in a bubble. In prior years, the sluggish global economy combined with Canada’s anaemic economic growth made rate increases seem impossible. Why kill slow but forward-moving momentum? But things have changed. The unemployment rate ticked up slightly, to 6%, but is still well within healthy parameters. Keep in mind, unemployment is still near the 50-year low! Then there’s our economic growth. After years of annual economic growth hovering around or under 1%, Canada finally saw a 3% growth in GDP in 2017. While this will be cut almost in half in 2018, this is due more to U.S.-protectionist measures than a lack of momentum in our nation’s economy. Finally, the big reason why analysts are predicting a rate increase today is due to one, final and probably the most defining factor: Inflation.

While the Bank of Canada has a tremendous influence on the nation’s economy — and subsequently the strength or weakness of Canada’s real estate market — it’s primary purpose is to control inflation and its secondary (but no less important) task is to ensure our nation’s financial stability. Right now, consumer inflation is on target sitting at 2.22% in May 2018, up from 1.7% in January 2018.

Here’s where Trump’s tariff-wars will play a role. These protectionist measures will increase inflation south of the border, which will put upward pressure on prices for goods imported and sold in Canada as well as slow business directly and indirectly involved with the industries impacted by the tariffs. It’s the perfect storm and a good preliminary step would be to raise rates, today.

What will happen with Canada’s real estate market?

Will this slow real estate activity? Yes and no.

Builders and developers with a long-term horizon know that Presidents with a twitchy-Twitter finger will come and go but market fundamentals will stay the same. Even as interest and mortgage rates rise slightly — to meet ongoing and current economic demands — the demand for housing still remains. And it’s a demand that’s only going to increase as more and more Millennials get sick of the rental roller-coaster.

All of this is known by Poloz and his BoC crew — and specific voices are making sure they don’t forget.

An RBC report released a week ago stated that higher interest rates were the No. 1 reason for the deterioration in affordability right across the country.

Unsurprisingly, Toronto and Vancouver led the way as the country’s least affordable markets. In Vancouver it takes 87.8% of household income to cover the costs of home ownership, the report said, while in Toronto that percentage is 74.2%. Compare that against the national average of 48.4%, or 43.7% in Montreal, 43% in Calgary and just 28% in Edmonton.

“[Affordability] is at crisis levels in Vancouver and poses a tremendous challenge for many Toronto-area buyers despite improving in the past two quarters,” stated the report authors.

But this lack of affordability doesn’t seem to be preventing prices from rising. Data from the Toronto Real Estate Board shows the average price of a home in the Greater Toronto Area climbed to a 13-month high in June — up 2% year-over-year to $807,871. TREB’s data was supported by similar data from the National Bank, but this report noted that the constrained ability to afford housing will result in an eventual downward pressure on prices.

“Since we don’t see how Vancouver and Toronto homebuyers could pay a higher share of their incomes for shelter, a downward adjustment of prices is conceivable,” write the National Bank economists. “If our scenario for interest rates out to the end of 2019 materializes (+75 basis point on the 5-year mortgage rate), and assuming historically average income growth, prices would need to fall on the order of 2% to keep home affordability from deteriorating further.”

Romana King
Romana King

Romana is an award-winning personal finance writer with an expertise in real estate. She is obsessed with the property marketplace and is the current Director of Content at Zolo.