The Canadian economy isn’t quite ready for the training wheels to come off, and it’s evident that the housing market and consumer spending will continue to support the lion’s share this year and next.
Could The Bank Actually Cut Rates Further?
Last week, the Bank of Canada dropped their usual reference to when interest rates may rise. It’s a sign that growth has been too slow to warrant ending low rate stimulus. In fact, it’s since been speculated that the Bank would have cut their Overnight Lending Rate even lower than one per cent, where it has remained since post-recession September 2010. The only reason it didn’t, according to a Nomura Securities report, is the worry that even lower rates will further fuel household debt and the heated housing market.
In the report, economist Charles St-Arnaud says that a rate drop could remain a future possibility if economic factors don’t turn around, stating, “The probability of a [rate] cut over the next six months could be as high as 20 per cent.”
The current BoC growth forecast for the last six months of 2013 is now two per cent – down from 2.5, which was already cut from the overly optimistic 3.2 per cent called for earlier in the year.
Will Prolonged Low Rates Call For New Mortgages Restrictions?
With the BoC maintaining such a low cost of borrowing and with the housing market making a voracious comeback, fears are renewed that Finance Minister Jim Flaherty may introduce new rules to restrict the mortgage market even further. He’s already done this four times in efforts to stem rapidly growing prices and debt in Canada, most recently by mandating a maximum 25-year amortization for high ratio buyers, and limiting HELOCs to 80 per cent. However, it doesn’t seem to have worked – the latest housing market data shows sales are still booming and prices still rising.
However, Flaherty has gone on the record to put concerns at ease – for now. He stated Monday that while the Bank of Canada has “basically no room to move”, he has “no intention of interfering in the market for the time being.”
He added that he plans to discuss market prices with industry developers to gain more insight to future demand.
Demand And Construction Industry To Remain Stable
Though it had a shaky early start this year (thank Flaherty’s aforementioned mortgage restrictions), Canada’s housing market has improved and will be relatively flat this year and next, according to the fourth quarter CMHC Housing Market Outlook, released on Thursday. The report calls for 185,000 starts in 2013, which is down from 2012 levels of 214,827, and resales from 456,700 this year to 468,200 in 2014.
A consistent market will also support our construction industry. A new study released by Royal Institute of Chartered Surveyors, a London-based group that surveyed senior construction managers nationwide, says housing construction output will increase by four per cent this year. That’s may not be a huge jump, but it’s certainly a turnaround from when we reported in May that lagging starts spelled potential job loss for the industry.