Despite Canadian housing concerns, higher interest rates on the way: economist

The asset management division of Canada’s biggest bank suggests there’s reason to be worried about the country’s housing market — but despite this, it expects higher interest rates remain on the horizon.

“We continue to be concerned by the Canadian trifecta of the oil shock, competitiveness challenges and a wobbly housing market,” writes Eric Lascelles, RBC Global Asset Management’s chief economist, in a weekly #MacroMemo.

“Despite this trepidation, cautious rate hiking seems more likely than rate cuts for 2019,” he continues.

The Bank of Canada uses the overnight rate as a tool to keep annual inflation around 2 percent. Around the time of the Great Recession and financial crisis of 2008, the central bank ushered in a period of historically low interest rates for consumers.

This was done in part to cushion against the effects of low oil prices on the Canadian economy. Since July 2017, however, the Bank of Canada has hiked the overnight rate five times.

The current rate of 1.75 percent is the highest in around 10 years, though it’s still far off the double-digit rates seen as recently as the early-’90s.

Recent central bank messaging has suggested more rate hikes are on the way, a view widely shared by market watchers. That said, the next increase may not come as soon as some expect.

Lascelles notes how the central bank’s tone changed slightly on January 9th, when it announced it was holding the overnight rate steady for now.

“From a language perspective, the Bank of Canada is clearly dragging its heels, adding ‘over time’ to its prediction that ‘the policy interest rate will need to rise,’” Lascelles observes.

While high household debt, affordability challenges in major cities, and speculation have created risks for the country’s housing market, there are positive signs that are supportive of resilience.

Oxford Economics, an economic-research firm that analyzes and forecasts trends, recently listed a few reasons it says Canada’s housing market isn’t on track for a crash like the one seen to the south of the border a decade ago.

For one, Canadian incomes are projected to grow in the coming years. Meantime, the vast majority of borrowers in the country aren’t falling far behind on their mortgage payments.

“There are some positive trends in Canada’s household finances,” writes Tony Stillo, Oxford Economics’ director of Canada Economics, in a Research Briefing.

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