Canadians haven’t seen any change in the overnight lending rate since July 2015 and it appears it will stay that way for at least a while longer: Bank of Canada governor Stephen Poloz announced Wednesday that the key rate is being held at 0.5 per cent. The bank rate remains at ¾ per cent, and the deposit rate at ¼ per cent.
While the decision to hold the rate came as no surprise to many economists, the big focus within the current announcement is the downward revision for the Canadian economy. On the positive side, the latest Monetary Policy Report shows that Canada is on track for a rebound in the second half of 2016 due to the return of full oil sands production and rebuilding activity in Alberta. It also anticipates that the rollout of the Child Care Benefit will result in improved household spending going forward.
However, the Bank says export data – while improved – isn’t strong enough to make up for all the ground lost during the first half of the year, when the economy saw a contraction by 1.6 per cent. Annual growth is expected to be stuck at 1.1 per cent this year and not speed up until 2017. In addition, the new mortgage rules that are now in place are expected to restrain residential investment while dampening household vulnerabilities.
Mortgage Rules Could Balance a Rate Cut
Formally announced by finance minister Bill Morneau at the beginning of October, the measures are aimed at stimulating the economy while reducing the fear of a real estate bubble burst in the country’s hottest markets. They involve a sweat equity test, changes to mortgage insurance and new reporting stipulations for capital gains tax. Policymakers believe this will mitigate risks to Canada’s financial system as a whole, over time.
Avery Shenfeld, chief economist at CIBC Capital Markets, tells the Financial Post that these rules work to lower the risk of a crash should the Bank decide to further reduce the key interest rate. However, he suggests that it could also raise concerns about a slowdown in new home building which would, in his words, “eat into growth.”
Initially, low rates were introduced during the recession years of the late 00’s to encourage both consumer spending and business investment. Instead, the central Bank has witnessed record levels of household debt – much of that attributed to mortgages. This has prompted concern that any further rate cuts would simply lead to higher debt levels while adding fuel to the fire in Toronto’s and Vancouver’s real estate markets.
The new mortgage rules have received plenty of criticism from economists who believe this will further push first-time homebuyers out of the market. Poloz will certainly be keeping an eye on how this plays out over the next few months. A slowdown has already become evident in Vancouver, but that has partially been attributed to the 15 per cent foreign buyer tax introduced in August and a reduction in sales in luxury markets. So far, Toronto remains red hot. The picture will become increasingly clear after October’s housing figures are released.
Our Neighbours to the South
The US has seen greater economic growth than Canada throughout the year, and it continues to strengthen after a weaker first half. While elevated uncertainty is leading US business investment on a lower track than originally expected, any improvement in confidence would have positive spillover effects for Canadian exports. Many experts believe a rate hike is on the agenda at the final Federal Reserve meeting of 2016, on December 14. This could have mitigating effects on our dollar, lead to higher oil prices and in turn, higher gas prices, and bump up Canadian bond rates.
Another factor will be at play in the coming weeks – that is, the outcome of the Presidential Election on November 8. According to RateSupermarket.ca’s Mortgage Rate Outlook Panelist Will Dunning, a Donald Trump victory or even a close race between him and Hillary Clinton might lead to uncertainty in the markets.
Globally speaking, the Bank says the world economy is expected to pick up pace through to the end of this year, and again in 2017 and 2018.
What This All Means for YOUR Mortgage
While the measures introduced earlier this week make it more challenging to secure a mortgage, homebuyers can be assured that there are still fixed and variable rate mortgages available at affordable rates. For fixed rate mortgages, bond yields for the most part are stable. For variable rate mortgages, no change to the overnight rate means homebuyers can still take advantage of low rates.
The much bigger factor, of course, is how the new rules will impact the market. This means, now more than ever, homebuyers need to do their research, get pre-approved for a mortgage before setting out home-hunting and shop around to find a rate that’s best for them. If you’re an existing homeowner with a mortgage up for renewal, it’s essential that you examine all your options and see if you can lower your payments.
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As for the Future
Two key economic indicators will be released later this week: August reports on manufacturing and retail trade. Following that, on October 26, the Canadian Mortgage and Housing Corporation will issue its housing market assessment where chief executive officer Evan Siddall says a “red warning” will be issued. According to the Globe and Mail, CMHC will increase the country’s housing market’s risk rating to “strong” from “moderate,” due to what Siddall says are “spillover” effects from Toronto and Vancouver into nearby markets.
Further down the line, the Bank will keep its eye on housing data, exports and the impact of fiscal stimulus – all of which are expected to be the keys for policy throughout the coming year, according to Benjamin Reitzes, senior economist at BMO Capital Markets. This will ultimately help the Bank decide whether to cut or raise the overnight lending rate in the near future.