Another voice has chimed into Canada’s interest rate discussion this week, stating central bank rates will start rising in May 2015. The remarks came from the Paris-based Organisation for Economic Co-operation and Development (OECD), and are in contrast to the stance taken by economists and the Bank of Canada itself. Most predictions are the benchmark interest rate will remain at 1 per cent and start to rise towards the end of 2015.
Canada’s real estate market has been under a great deal of scrutiny, with speculation over the past year that the market is overvalued and due for a sharp correction. The OECD’s latest remarks on Tuesday add to the yet-to-be proven forecast that Canada’s housing market is in trouble. But how should homeowners interpret the OECD mortgage rate predictions?
How Have Past Warnings Played Out?
The OECD’s stance is just the latest take on the health of our housing market; in 2013, a report from Deutsche Bank stated Canada has the most overvalued housing market in the world, with housing prices 60 per cent higher than they should be. The bank ranked Canada in the #1 spot out of 20, followed by Belgium, New Zealand, Norway and France. However, if anyone had followed Deutsche Bank’s advice they would have since missed out on significant gains in Canada’s housing market. In its latest report on housing prices, the Canadian Real Estate Association (CREA) says the national average sale price of real estate in Canada rose 7.1 per cent on a year-over-year basis in October 2014.
What Does the Bank of Canada Have to Say?
Our central bank has kept the overnight lending rate has been at 1 per cent since September 2010. The next announcement is scheduled for December 3 and the forecast is the rate will remain the same. At the last announcement in October the bank stated, “The Bank judges that the risks to its inflation projection are roughly balanced. Meanwhile, the financial stability risks associated with household imbalances are edging higher. Overall, the balance of risks falls within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at 1 per cent.” There is no doubt higher rates will put pressure on home prices, but the Bank is fully aware that when rates rise they have to do so in a way that is slow and steady, in order to keep the market stable.
How Will Rates Rise?
When rates rise it will be a slow process; the Bank doesn’t want Canadians to lose their homes because their debt commitments are suddenly too expensive. If you own a home, start making bigger payments to take advantage of the lower rates, as all signs point to some increase in 2015. If you’re shopping for a mortgage you may be wise to consider the lowest fixed rate you can find. This way you have taken all the risk off the table and know that you can afford to pay for the house you bought for the next five years. Always pay you mortgage as if it’s 2 percentage points higher than what the bank is offering. You will be mortgage free faster and be well prepared for a rate hike in the future.
What to Make of the OECD’s Predictions
Canadian homeowners would be remiss if they did not listen to what experts outside of the country are saying about our housing market. They see they whole picture and without objection are able to analyze what the situation is really like. But that doesn’t mean Canadian homeowners should be bracing for a sharp decrease in prices. The negative rhetoric that has plagued Canada’s housing market is proof positive that the situation in not as dire as some may predict it to be, because the housing market remains strong.