Economic indicators point to further rate hikes – CMHC

A greater proportion of Canadians’ household income will go to debt servicing

By Ephraim Vecina

30 Nov. 2018

The current robustness of Canada’s economy is expected to impel further interest rate growth, according to a new report by the Canada Mortgage and Housing Corporation.

In its latest Quarterly Financial Report covering July to September 2018, the CMHC stated that the national economy is set to continue enjoying a moderate pace well into next year.

The Crown corporation predicted annual GDP growth to settle at 2% this year and 1.9% in 2019, “with the economy operating close to its potential rate.”

The consequent pressure on interest rate growth would make itself felt in debt service costs, the CMHC warned. The nationwide mortgage debt service ratio went up to 6.5% in Q2 of 2018, compared to the 6.3% during the same time last year.

Further rate hikes imply “that an increasing share of household income would be required to service higher debt repayments,” according to the report, adding that “although debt levels remain elevated, these trends are expected to curb borrowing activity, while also reducing dependence on debt to fuel economic growth in Canada.”

And while wage gains are still expected to accelerate, debt service expenses will counteract the positives of improved income. Household spending growth will moderate to around 2% this year, compared to the 3.5% in 2017.

Unfortunately, all of these factors will converge to weigh upon Canada’s housing segment, which the CMHC said has exhibited signs of cooling earlier this year.

“Taken together—tighter mortgage rules, rising interest rates and a slowing economy—are expected to underpin reduced demand for housing, resulting in slower price growth over the near term,” the report cautioned.

Sales activity as recorded in MLS® operated by real estate boards nationwide showed a considerable 11.7% year-over-year slowdown in the first 8 months of 2018, down to 327,206 units. Canadian housing starts during the same time frame remained flat at around 144,644 units.

Meanwhile, the national average MLS® price stood at $452,233 from January to August this year, declining by 3.7% annually. This was the first observed decline in national sales prices since the 2009 recession.