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BoC says Market will Cool, Moody’s Agrees

16 June 2012

The Bank of Canada released its semi-annual Financial System Review this week and in it, they forecasted that the housing market in Canada was set to cool – a trend many have been worried about for the past year or so. The report, while not any real new news, does once again put the spotlight on overheated markets; and those who are currently holding too much debt in their Toronto mortgage or other household debt, such as home equity lines of credit.

The Bank of Canada spoke out this week about the reality of rising interest rates in the report, “The continued high level of activity and stretched valuations in some segments of the housing market are of increasing concern.”

And the chief analyst for Canada at Moody’s Investors Services agreed. When speaking about BoC’s predictions, Stephen Hess agreed that housing prices will fall, that it will be in the next few coming months, but that the result will be relatively mild and won’t leave Canadians with underwater mortgages, or with debt that they can no longer afford.

“It wouldn’t be surprising if there was some correction in the housing market,” Hess said. “Will that cause a financial problem, system-wide? In the end we don’t think that that risk is very great because of the lending standards that are in the banks, because the economy is still doing relatively well and employment is all right.”

The federal government is responsible for both factors; first in the Bank of Canada keeping interest rates at historical lows that have kept people borrowing and therefore, kept the economy churning. The lending standards that Hess referred to is also due to action on Ottawa’s part. With stricter lending rules, much tighter requirements on HELOCs, and changing amortization periods and rules on mortgage insurance, continual adjustments have been made to make sure that Canadians stay within their own affordable boundaries.

During a conference in Montreal this week, Bank of Canada Deputy Governor, Agathe Cote, also echoed the need for Canadians to be ever-vigilant about a cooling housing market and rising interest rates occurring at the same time.

“As we often remind households, it’s important to realize that eventually interest rates are going to return to levels that are closer to normal,” she said. The BoC also expects our debt level to rise from the 150 per cent shown during the fourth quarter – a figure that’s already higher than debt levels in the United States and Britain.

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