In a cautious nod to the Bank of Canada’s regimen of gradual rate increases, and a further affirmation that the interest rates for a slew of mortgage products – construction loans, home mortgages, home equity loans – are likely to remain at (or near) current lows, the Canadian Homebuilders’ association chief economist, Dr. Peter Andersen, issued an economic update to homebuilders that painted a “positive picture” for Canadian housing markets.
“Speaking directly to homebuilders,” MetroNews quotes Andersen as writing, “We remain positive for the housing market outlook in Canada. Mortgage interest rates are not going up sharply anytime soon and the next recession is unlikely until mid-decade at the earliest.”
In his article written for Canada’s home construction insiders, Dr. Andersen offered an analysis (though perhaps overstated) that emphasizes the importance of the bond market in influencing home mortgage products. “(I) is important to remember that mortgage rates are determined by the bond market and not by the Bank of Canada,” he writes. “Media headlines that higher interest rates are a problem for housing markets are off base. Mortgage rates have been declining even though the Bank of Canada has raised its overnight interest rate target three times.”
The relationship between bonds, bond yields and central bank rates is more intertwined than Dr. Andersen’s abridged explanation. As central bank rates go up, bond prices go down, as investors look for the “safest” place to park their money.
Nevertheless, Dr. Andersen rightly points out that, “mortgage rates have been declining even though the Bank of Canada has raised its overnight interest rate target three times.” This may, however, be an aberration caused by banks and credit unions competing for a dwindling pool of recession-weary borrower and the earlier release of pent-up consumer demand.
Dr. Andersen, writing for an audience that is particularly sensitive to rate changes, and how such changes their ability to turn over new home construction, is perhaps the most hawkish economist to speak out in recent weeks. Dr. Andersen is predicting further Bank of Canada rate hikes on both October 19 and December 7, the last rate review meetings in 2010.
Most mainstream analysts are forecasting a pause (and perhaps a lengthy pause) to the Bank of Canada’s rate hike regimen, with most analysts noting that the market has priced in a pause in further rate hikes at least for the Bank of Canada’s October 18 meeting.
Banks have traditionally tied their prime lending rate to the Bank of Canada’s overnight lending rate (although they are also affected by bond yields). A pause in the central bank further raising its overnight lending rate – Canada being the only G7 country to have raised rates this year – is good news for homebuilders, as well as home purchasers and homeowners. Continuing low bank rates for construction loans, home mortgages and home equity loans and lines of credit, is one of the key factors underpinning Canada’s recovery from recession, even as the U.S. economy sputters.
