Slowing global growth, exports and real estate investment leads to lowered rates.
For the first time in three years, the Bank of Canada has lowered its five-year qualifying mortgage rate from 5.34% to 5.19%. Overall, the Canadian interest rate environment is tied to broader economic performance and levels of global economic uncertainty, says Bryan Yu, deputy chief economist, Central 1, Vancouver, British Columbia. “While the Canadian labor market continues to perform well, and second quarter growth was robust, the economy is expected to expand at a modest pace (1.5%) by year-end 2019. Retail spending is also weak, manufacturing and export performance has underwhelmed, and housing and non-residential investment are negative.”
He adds that the negative investment cycle is reflecting uncertainty in the future economy, given deterioration in the U.S.-China trade relationship. “Canada is also dealing with the fraying of its own relationship with China. And housing will likely receive a boost from federal policy to boost first-time homeownership, effective in September.”
Yu believes there is no immediate need for a Bank of Canada rate cut. But the global growth cycle has slowed, and unless this is arrested by a calming of the trade waters, he expects the Bank of Canada to follow the U.S. Federal Reserve in easing rates. “Canada is not an island and would be influenced by a U.S. economic slowdown through export channels and financial markets,” he adds. “We expect the Bank to cut by 25 basis points in early 2020.”
Markets are already cutting prices. and indeed, mortgage rates have declined sharply over the past 12 months. This is providing some lift for housing market demand in Canada, although federal mortgage stress tests are limiting pass-through to many buyers.
Yu sees consumer sentiment taking a breather with global economic unrest in what has been a tumultuous period in housing markets. “That said, a tight labor market and solid population growth will support the economy and housing. Lower interest rates are already generating upward sales momentum in the resale housing market, and prices are firm. Even Metro Vancouver, which has borne the brunt of a housing downturn, is stabilizing and expecting to see positive momentum. While the market won’t see the price gains of recent years, higher sales volumes and prices will drive higher lending activity.” cues icon
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