The Bank of Canada has chopped central rates twice this year to accommodate a slowing economy. Could we be in for another rate decrease in September’s announcement? A recent stock sell-off, global market upheaval and the sliding price of oil all point to the possibility. In the meantime, however, BoC head Stephen Poloz refuses to confirm an official recession, and economists consider the next crop of GDP and jobs numbers (out next week), to determine whatever happens next.
However, the vote remains split on whether rates need to be cut again – and one of Canada’s big banks anticipates the opposite.
Mortgage Rates to Rise by 2016: RBC Economics
In a recent report, RBC has stated that interest rates will remain unchanged for the rest of 2015 before actually rising in 2016. Given the current trend of economic turmoil, it’s a pretty strong statement. The big bank has a glass-half-full view of the economy, saying it sees gradual economic recovery over the next year.
The bank also warns that a rate uptick will have a slowing effect on the housing market, and offers strong caution that there’s a possibility of a “severe” downturn in the housing market if either the unemployment rate or interest rates shoot up.
However, that’s a worst-case scenario. In general, RBC doesn’t see an outright crash in the real estate market. Instead it sees the market cooling in a moderate and controlled way. For example, it predicts home sales to decline by less than 10 per cent over the next few years and price appreciation to slow to 3.2 per cent by 2016. However, even a small rate increase can shock consumers; you may be able to afford your mortgage payments now, but it might be a different story if mortgage rates are three percent higher upon renewal.
Wondering how mortgage rates will change in the short term? Check out our expert Mortgage Rate Outlook Panel>
Oil Shock Front-Loaded
RBC seems to agree with Poloz’s view that that the shock from lower oil prices was front-loaded. In the report, RBC says the shock from lower oil prices hasn’t been enough to stall our seemingly unstoppable real estate market.
In fact, despite lagging sales in provinces hardest hit by lower oil prices like Alberta and Saskatchewan, the Canadian real estate market looks to be having one of its best years ever. What’s behind this urge in the real estate market? RBC credits record-low interest rates as fueling the real estate markets in places like Toronto and Vancouver, where the average price of a detached home is over $1 million.
Interest Rates in 2015 and Beyond
It’s been quite a roller coaster year for interest rates. In January, the Bank of Canada shocked markets by cutting the overnight lending rate by 25 basis points to 0.75 per cent. Prior to that, interest rates had been frozen at 1 per cent dating all the way back to September 2010. Faced with a lagging economy due to lower oil prices, the Bank of Canada did it again, cutting interest rates another 25 basis points in July to 0.5 percent.
RBC’s main argument that interest rates will rise is that oil prices haven’t had enough of an effect on the housing market. The big bank calls for the Bank of Canada to raise rates to 1.25 by 2016.
“It has long been our view that the eventual rise in interest rates from generational low levels will produce significant headwinds for Canada’s housing sector,” the report said. “Much of the market’s vibrancy in the past several years can be attributed to exceptionally low — and declining — interest rates.”
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He offers Unbiased Fee-Only Financial Advice, specializing in pensions and the decumulation of financial wealth in retirement. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/