BoC holds interest rate but repeats warning on housing

The Bank of Canada again maintained its target for the overnight rate at 0.50 per cent in its interest rate announcement on July 13, citing a spotty performance of the Canadian economy, but also repeated an earlier warning about the housing market.

While the Bank’s Monetary Policy Report, released the same day, stopped short of calling for action to tackle rapid house price increases in Vancouver and Toronto, Governor Stephen Poloz did issue another warning that the risks in these two markets are “elevated and rising.”

“We continue to have the same concerns that we expressed in our June Financial System Review about household indebtedness and housing, particularly in the Greater Vancouver and Toronto markets,” Senior Deputy Governor Carolyn Wilkins said. The sharp rise in housing prices in these markets is not supported by economic fundamentals.

“House price growth, year over year, of 10 to 20 per cent… just doesn’t look like the growth in the fundamentals is going to keep up, so it’s in that sense that we say the growth rates are unsustainable.”

While few experts predicted any movement on the interest rate front, some did expect a call to action on housing in the policy report.

“There’s a lot of conversation happening around the Canadian housing market, especially with regards to Vancouver and Toronto,” Alyssa Furtado, CEO of ratehub.ca, told YPNextHome. “While some were expecting housing to have a greater profile in the report, we don’t yet have new and exciting information on the market to share. The government has promised funding to monitor the housing market, and when we start seeing some of that data come to light, it’ll be a more exciting time to talk about the issues and what kinds of policy needs to be in place to address it.”

An actual rate hike from the Bank of Canada isn’t expected until as late as 2019, according to some analysts, Furtado adds. “But if we see changes from the Department of Finance or CMHC in the coming weeks or month, it could possibly be regarding another change to the down payment requirements – moving the minimum to 10 per cent across the board – or changes to the land transfer tax within Toronto and Vancouver, specifically. There have been similar changes in the last few years, intended to cool the market and it hasn’t worked. We shouldn’t be surprised if additional measures are taken.”

As for the Canadian economy at large, the BoC says the quarterly pattern of growth has been uneven. Real GDP grew by 2.4 per cent in the first quarter, but is estimated to have contracted by one per cent in the second quarter, pulled down by volatile trade flows, uneven consumer spending and the Alberta wildfires. A pick-up to 3.5 per cent is expected in the third quarter, as oil production resumes and the rebuilding begins in Fort McMurray. Consumer spending is also expected to get a boost from the Canada Child Benefit.

Real GDP is expected to grow by 1.3 per cent in 2016, 2.2 per cent in 2017, and 2.1 per cent in 2018. The Bank projects above-potential growth from the second half of 2016, lifted by rising US demand and supported by accommodative monetary and financial conditions. Federal infrastructure spending and other fiscal measures announced in the March budget will also contribute to growth. Despite recent volatility, the Bank expects the underlying trend of export growth to continue, leading to a pick-up in business investment. Higher global oil prices are helping to stabilize Canada’s energy sector and household spending is expected to increase moderately.

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