Housing market to be “first victim” of rising interest rates, says former Bank of Canada economist – .

Housing market to be “first victim” of rising interest rates, says former Bank of Canada economist – .

“When prices increase, this accessibility will disappear very, very quickly,” said Charles St-Arnaud.

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Housing activity is moving further and further away from fundamentals, two new reports show, reinforcing fears among some housing experts that the Canadian real estate market has entered a bubble.

Bloomberg, the New York-based global information and data company, last week ranked Canada as one of the most dynamic housing markets on the planet, while closer to home a former economist of the Bank of Canada published research that suggests housing in Toronto and Ottawa is overvalued. on the basis of historical metrics, whereas Montreal is becoming more and more so.

The heat in these eastern cities, combined with the chronically high prices in Vancouver, make the national numbers sparkling as conditions in Calgary, Edmonton and Winnipeg appear reasonable, according to analysis by Chief Economist of Alberta Central , Charles St-Arnaud. But since these places are home to 50 percent of Canada’s population, the Bank of Canada will be forced to raise interest rates with extreme caution, as low borrowing costs are the only reason housing is affordable. said St-Arnaud.

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“The housing market will likely be the first victim of the higher rates,” said St-Arnaud, who previously worked at the Bank of Canada and for Morgan Stanley and Nomura Holdings Inc. in London. “When rates go up, that accessibility will go away very, very quickly. “

Bloomberg’s “Bubble Ranking” generates scores by country by considering the cost of buying a house versus renting; the price / income ratio; inflation-adjusted price growth; nominal price growth; and the annual rate of growth in household credit. New Zealand tops the list, posting the best scores in four of the five categories. Canada is second, followed by Sweden, Norway and the United Kingdom, respectively.

Some housing experts believe the Canadian real estate market has entered a bubble. Photo de Getty Images/iStockphoto

National rankings like this are of limited use because housing is almost always determined by local factors, St-Arnaud said. That’s why he decided to focus on Canada’s seven largest cities – Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa and Montreal – to determine how affordability extends across the country.

The analysis showed that changes in interest rates could generate significant headwinds in large city housing markets, as large numbers of people would otherwise struggle to keep up with high prices. So when Bank of Canada Governor Tiff Macklem looks to raise interest rates, as he has said he might do as early as the second half of next year, he will need to be aware of the the ripple effect that the policy change could have on Canadian homeowners.

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In May, house prices climbed 11.3% nationally from the same month last year, according to Statistics Canada, largely thanks to record interest rates put in place by the Bank of Canada. Canada to address the COVID-19 crisis.

St-Arnaud determined that in Toronto, Vancouver, Montreal and Ottawa, a 2.5 percentage point increase in the Bank of Canada’s benchmark lending rate would push these markets into “overvalued territory”, and therefore more to risk of sinking.

Admittedly, few people see such a significant increase coming anytime soon. However, the combination of higher prices and a lower interest rate adjustment would have a similar effect on affordability, St-Arnaud found. For example, a 10% price hike in those four cities, coupled with a 1.5 percentage point hike in borrowing costs, would make those markets overvalued, according to his findings.

On the other hand, Calgary, Edmonton and Winnipeg could tolerate an interest rate hike of five percentage points and still remain fairly valued, according to St-Arnaud.

Higher sensitivity to borrowing costs than in the past will force a slow approach when the Bank of Canada decides to normalize its monetary policy, St-Arnaud said. For this reason, Macklem should act preemptively by raising rates to avoid having to quickly increase borrowing costs if inflation takes off, the economist said.

“They must take this into account…. and be very, very progressive as they can be, ”said St-Arnaud. “A 25 basis point hike will have more impact than we’ve seen in the last 20 or 30 years. “

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