Don’t cut rates, LePage says
One of Canada’s major real estate firms is urging the Bank of Canada not to cut interest rates tomorrow.
Royal LePage says it’s worried that a cut in the central bank’s benchmark rate could “over-stimulate” already high-flying markets such as Toronto and Vancouver.
Those are the two Canadian cities deemed the most frothy, with prices running up sharply as consumers add to already swollen debt levels in a low-rate environment.
“While the oil shock has been a troublesome drag on our economy this year, it seems premature to ring the recession alarm bells now, injecting further monetary stimulus,” said LePage chief executive officer Phil Soper.
“The country’s all-important real estate market simply does not need a rate cut,” he said today in releasing the firm’s look at how the market performed in the second quarter.
“I worry that stoking this engine further could move us from a perfectly manageable major market expansion into a more difficult correction, as price levels decouple from more household incomes.”
Royal LePage’s warning came as the latest reading showed Canadian home prices climbing yet again, though that’s because of gains in specific home types and regions.
Prices rose 1.4 per cent in June from a month earlier, marking the sixth straight jump in a row, and 5.1 per cent from a year earlier, according to the Teranet-National Bank home price index released today.
Vancouver and Toronto again led the way, with prices up 8.5 per cent in the former and 7.8 per cent in the latter on an annual basis.
The index is now at a fresh high, but only Toronto, Vancouver and Hamilton are actually at record levels.
“In these markets, well above average price growth from a year ago reflect tight resale market conditions,” said National Bank senior economist Marc Pinsonneault.
Those gains, though, aren’t across the board, with condo prices up 4.7 per cent and 3.2 per cent, respectively, in Toronto and Vancouver and others up a far sharper 10 per cent.
“Were it not for non-condo dwellings in these two regions, house prices at the national level would have risen rather modestly over the last year,” Mr. Pinsonneault said.
The Bank of Canada is set to announce its rate decision tomorrow morning, and some market watchers say there’s a good chance it will follow January’s surprise cut with another, which bring the key rate down to just 0.5 per cent.
The central bank is counting on a bounce in non-energy exports to help juice the economy, hoping the economic buoys will shift to trade and away from consumers.
A rate cut tomorrow could threaten that, warned Derek Holt of Bank of Nova Scotia.
Such a move, he said in a recent report, “risks delaying the rotation of growth sources away from the household sector and toward the investment and export sectors through over-stimulating consumption and housing and setting a low bar for hurdle rate targets.”