Bank of Canada’s Rate Hiking Path Adds Risk to Housing Market

Steve Saretsky -

To little surprise the Bank of Canada followed through with another interest rate hike this week, pushing the overnight rate to 1.75%, the fifth increase in just over a year. Perhaps more surprisingly was the hawkish stance Governor Poloz took, effectively putting households on notice that they could be more aggressive in their push towards a neutral interest rate of between 2.5%-3.5%.

While Governor Poloz is certainly optimistic on the resiliency of the Canadian economy and the prospects for future growth, recent data points may suggest otherwise. In his monetary policy report yesterday Poloz proclaimed, “Household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth. Households are adjusting their spending as expected in response to higher interest rates and housing market policies”

However, retail sales volumes have fallen in each of the past three months, now growing just 0.7% Y/Y compared to the greater than 8% growth just over a year ago.

Canadian retail sales
Source: Manulife Asset Management

Meanwhile, Poloz also boasted, “household credit growth continues to moderate and housing activity across Canada is stabilizing. As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated.”

Yet the Canadian Real Estate association noted sales across 70% of local markets were down on a year over year basis, with nationwide home sales trickling in at a six year low for the month of September. Home sales are particularly sluggish in Vancouver and Calgary where they sit at 18 and 22 year lows respectively.

Canada home sales percent change
Y/Y Percent change in home sales for September 2018

Further, with credit growth continuing to slow, and liquidity contracting, one could certainly argue vulnerabilities are edging higher, not lower, as over indebted households are confronted with the inability to roll over existing loans. This has pushed an increasing number of borrowers towards the private lending space which ultimately provides more risky short term loans.

Canada household Credit
Source: Bank of Canada

In addition, the impact of the Bank of Canada announcement also pushed the big 6 prime rates higher by 15bps, this immediately impacts all Canadian households carrying a variable rate mortgage, and other lines of credit, all of which are at dangerously elevated levels.

Given the current backdrop it’s hard to share the same optimistic view as the Bank of Canada. The always outspoken David Rosenberg certainly feels the same way.

Join the Monday Newsletter

Every Monday morning you'll receive a short and entertaining round-up of news on the Vancouver & Canadian Real Estate markets.

"*" indicates required fields

The Canadian Economy

Steve Saretsky -

Happy Monday Morning! We got a string of new data this past week confirming inflation in consumer goods, and housing are proving to be more than transitory. Canada’s consumer price index continued to drift higher with prices hitting an 18 year high, up 4.7% from last October. The recent floods in BC...

Steve Saretsky -

The calls for impending interest rate hikes continues. CIBC’s chief economist, Benjamin Tal, was out recently suggesting the Bank of Canada could hike its benchmark interest rate at least six times beginning in early 2022. “I think there is a risk of getting into the market at today’s rates,” noted Tal....

Steve Saretsky -

The BC Government announced it is looking at several cooling measures for the housing market in 2022. They have highlighted two measures. The first is an end to the blind bidding process, and the other is a mandatory “cooling off period” which will allow any buyer a 7 day recession...

Steve Saretsky -

The Bank of Canada continues to slowly drain liquidity after flooding the system with a firehose of cash during the pandemic. Bank of Canada governor Tiff Macklem announced the end of Canada’s QE program (also known as money printing). Furthermore, in Macklems words, “We expect to begin increasing our policy...

Steve Saretsky -

Consumer price inflation ripped higher in September, surging 4.4% year-over-year, the fastest pace of price increases in 18 years. Let’s discuss this further. We have an inflation problem and the Bank of Canada remains of the view that inflation will be transitory. Although they really can’t say otherwise, for if...

Get the Saretsky Report to your email every month

The Saretsky Report. December 2022