Interest rates have been expected to rise all year, but ongoing negotiations for a new North American Free Trade Agreement have quashed the latest planned hikes.
“The Bank of Canada indicated that if there were another increase of the interest rate and then there was a collapse of the trading relationship with North American partners, that would significantly negatively impact the economy,” said Tim Hudak, CEO of the Ontario Real Estate Association. “Certainly from our point of view, that’s bad for the housing market, so the Bank wisely took a wait-and-see approach until the trade negotiations are completed.”
Minister of Foreign Affairs Chrystia Freeland has been on the file for the Trudeau government, but working diligently behind the scenes is Canada’s Ambassador to the United States David MacNaughton. While that could abet a favourable outcome for Canada, rising rates in conjunction with the mortgage stress test open up another can of worms.
“Every economist may not agree on the timing, but interest rates are heading up, which means mortgage rates are heading up, and if you add 200 basis points onto every increase, you’re really pushing a lot of first-time homebuyers out of the market and impairing the dreams of move-up buyers who have kids and want a little more space,” added Hudak.
Hudak believes the tribulations surrounding a new NAFTA agreement illuminate a looming problem for Canadians, and that the time is nigh to revisit the Office of the Superintendent of Financial Institution’s B-20 stipulations, notably the mortgage stress test.
“In an era of rising interest rates, whether that rise is stalled by uncertainty in NAFTA or not, we need to drive home the importance of revisiting the stress test. It doesn’t make sense to keep piling up more expensive mortgages on top of rising rates from the Bank of Canada.”
Guideline B-20 was put in place largely to curtail exorbitant price escalation in Toronto and Vancouver, however, it’s chilled the Canadian housing market from coast to coast, with smaller markets bearing the brunt of what Croft Axsen calls restrictive policies.
“I’m not saying they shouldn’t be trying to address housing prices in Toronto and Vancouver, but I think most of that has to do with supply,” said Axsen, owner of Dominion Lending Centres Jencor Mortgage Corporation in Calgary. “There’s this overall restriction throughout the entire economy about who can get a mortgage, how many people can get a mortgage, and how big the mortgage they can get is. I don’t think they understand what they’re doing. It makes me nervous that bureaucrats are making these decisions and not bankers.”