The Bank of Canada raised interest rates by a quarter-percentage-point at its January 17, 2018 meeting. This brought the benchmark rate to 1.25%, the first time it was over 1% since 2009. That was the third interest rate hike since the summer of 2017.
The Bank of Canada did this in response to strong economic news like strong GDP growth, employment gains and the lowest unemployment rate since 1976. Inflation inched up toward the 2% target and is expected to remain near that level for the next two years.
However, the Bank of Canada warned that the good news that led to the rate hike was mostly in the rear view mirror and the future may not be so bright. The Bank of Canada warned that the renegotiation of NAFTA may kill future economic growth. After all, half of all of Canada’s exports go to the United States. We will see continued growth if the Canadian economy shifts from home construction and consumer spending to exports and business investment.
Yet businesses are already reluctant to invest in Canada in case they end up on the wrong side of higher U.S. tariffs. This uncertainty has been seen since 2016, and it has cut business investment by as much as two percent per year. This has an estimated 0.3% drag on economic growth per year. The Central Bank’s forecasts currently predict 2.2% growth in 2018 and 1.6% in 2019. For the record, economic growth was around 3% in 2017.
This has led investors to bet that there won’t be a rate hike at its March 2018 meeting, while there is an expectation of a future minor hike later in the spring. If NAFTA talks extend past the Mexican election in July, then Poloz may raise rates before mid-summer.
A number of economists expect the Bank of Canada to raise rates at least twice this year, though the odds ebb and flow with the NAFTA negotiations and state of the United States’ economy. However, they won’t go up fast because that would hurt too many borrowers still deep in debt. It hit a record high of 167.8% of disposable income in 2017.
This also explains why the solution to the overheated Canadian mortgage market was regulatory instead of just raising interest rates. These rules included requiring all borrowers to undergo the stress test, running the stress test at the higher threshold, increasing the loan to value ratio required for homes and restricting use of bundled loans to get around LTV limits. This is on top of the 15% tax foreign buyers in Vancouver and Toronto now pay.
The stress test is impacting both home purchases and mortgage re-financing, since lenders have to qualify on either the current Bank of Canada posted rate or 2% above their current, contracted mortgage rate. Because of the interest rate change, the posted rate for five year fixed mortgages passed 5% for the first time in four years.
The attempts to dampen the housing market without crippling the economy is also why the Canadian government no longer issues mortgage insurance for homes over a million dollars. Mortgage Professionals Canada said that these changes together would dampen home sales ten to fifteen percent annually, while price growth would be reduced by two to four percent.
For those who do qualify for a home loan, they’ll see prices stabilize or even decline while supply increases. This is especially true for those applying for a new mortgage in 2018, since so many people accelerated their home purchases in late 2017 to lock in a loan before the new rules took effect.
If you’re in the market for a new home, contact a Calgary mortgage broker to secure a mortgage before rates go up again later this year.