Paul Vieira, Financial Post
With tighter mortgage rules now on the books, the Bank of Canada no longer needs to contemplate rate hikes to specifically deal with an overheated housing market. That could give the central bank some wiggle room on how quickly and forcefully it needs to push borrowing costs higher.
Still, many analysts contend the central bank will have to start raising its key policy rate from “emergency” levels of 0.25% by the second half of the year as the economic recovery gathers pace.
To be sure, the record low rate — and a conditional pledge the bank made to keep it there until July — has helped stoke red-hot activity in the housing market.
But the central bank, in speeches over the past few months, appears to have succeeded in persuading policy-makers on Parliament Hill to use regulations to nip a possible housing bubble in the bud.
As a result, “the market’s expectation for rate hikes should be scaled back modestly as housing slows and the need to address it via monetary policy fades,” said Eric Lascelles, chief economics and rates strategist with TD Securities.
Avery Shenfeld, chief economist at CIBC World Markets, said the changes introduced by Jim Flaherty, the Minister of Finance, might give the central bank “the luxury of being slow on the timing of subsequent rate hikes.”
The rules, announced yesterday, are intended to slow some of the speculative activity in the housing market and ensure first-time homebuyers are better equipped to handle eventual rate increases. Among the changes is that homebuyers must qualify for a five-year, fixed-rate mortgage, even if they want to take a shorter-term variable-rate product, in order to obtain mortgage insurance, should it be required. (It is required if the down payment is less than 20% of a property’s value.)
The rules take effect on April 19.
The pending implementation of these rules, coupled with the coming introduction on July 1 of harmonized sales taxes in Ontario and British Columbia and the spectre of higher rates, are likely to bump up first-half 2010 growth projections as Canadians race to buy real estate before it becomes more expensive.
“These changes are going to heavily distort the timing of housing purchases,” said Derek Holt, vice-president of economics at Scotia Capital.
The housing market has clearly been one of Canada’s main drivers of economic growth. In the latest gross domestic product data for November, which suggested the economy grew by a bigger-than-expected 0.4%, real estate agents and brokers recorded a 0.7% rise in output.
Analysts say this is why the government crafted the rules to ensure enough caution against excessive risk-taking, while at the same time not handicapping growth.
The Bank of Canada began warning about risky debt levels in December by noting the country’s debt-to-income ratio had climbed to a new high of 142% as of mid-2009, as consumers rushed to take advantage of low borrowing costs to buy assets.
Central bank officials also dismissed talk of a housing bubble– as did Mr. Flaherty yesterday — and warned raising its key policy rate to address housing concerns would be akin to dousing the recovery with cold water.
Mr. Holt, who had repeatedly warned in recent weeks that the real estate market was getting ahead of itself, said the rules will not dissuade rate hikes from the central bank beginning as early as July.
“We still are left with the observation that we have moved beyond an emergency rate setting for the overall economy. There are still hurdles and risks that require low rates, but not emergency-level rates for any reason beyond the third quarter,” he said.
Mr. Shenfeld still leans toward a rate hike in the third quarter while Mr. Lascelles sees a higher rate by year-end.
HIGHLIGHTS
- Borrowers must qualify for a five-year, fixed-rate mortgage instead of a three-year loan when calculating gross debt-service and total debt-service ratios
- Refinancing will be capped at 90% for government-backed, high-ratio mortgages versus 95% previously
- A down payment of 20%, instead of 5%, will be required for government-backed mortgage insurance on non-owner-occupied properties
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