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Real Estate the Centre of BOC’s Latest Economic Downgrade

4 November 2016

New measures to rein in Canada’s booming real estate sector will weigh on GDP growth, BOC says.

The Bank of Canada (BOC) has downgraded the country’s economic outlook yet again, citing a cooling real estate sector and weaker exports.

The central bank is now projecting Canada’s real gross domestic product (GDP) to expand just 1.1% this year, down from its July forecast of 1.3%. For 2017, the BOC expects growth of 2%, down from 2.2% previously. GDP refers to the total value of goods and services produced in the economy.

The downward revision “is due in large part to slower near-term housing resale activity and a lower trajectory for exports. The federal government’s new measures to promote stability in Canada’s housing market are likely to restrain residential investment while dampening household vulnerabilities,” the BOC said in its October 19 policy announcement, where it held interest rates at 0.5%.[1]

With its zero appetite for rate hikes, the BOC has created a dilemma for policymakers concerned about runaway growth in the nation’s real estate sector. In an effort to cut out some of the risk from residential lending, the Ministry of Finance recently announced new mortgage regulations that essentially raise the eligibility guidelines for mortgages to get insured. This includes a new stress test that requires borrowers to prove they can afford mortgage payments based on the BOC’s posted rate, which is currently at 4.64%.[2]

The new mortgage rules, which came into effect October 17, raised concerns that home sales could fall sharply over the next 12 months. Economists at the finance department projected sales could drop as much as 8% over the next year.

Moody’s Analytics recently projected a broad slowdown in Canada’s housing market, but not anything like the crash that some market participants fear. The credit rating agency said house prices for detached single-family homes are forecast to rise 2.9% annually over the next five years. That’s only a fraction of this year’s 9% expected growth.[3]

Measures by the BC Government to curb foreign investment in Metro Vancouver also appear to be working. Sales in the region plunged 32.6% year-over-year in September, the Real Estate Board of Vancouver reported earlier this month.[4] However, home sales across the country rose 0.8% in September over the previous month, according to the Canadian Real Estate Association.[5]

With consumers increasingly relying on credit to make ends meet, home equity remains the biggest source of wealth for many Canadians. For many homeowners, rising home prices are a very good thing. For a dismal economy that has flirted with recession and high unemployment, sky-high prices are creating new affordability challenges and making many people nervous.

Canada’s economy contracted in the second quarter, as wildfires in Alberta took millions of barrels of crude production offline. The BOC projects the economy to grow 3.2% in the third quarter. Fourth quarter growth is expected at just 1.5%, down sharply from the July forecast of 2.8%.[6]



[1] Canada of Canada (October 19). Bank of Canada maintains overnight rate target at ½ per cent.

[2] Bank of Canada. Daily Digest.

[3] Nicole Bogart (October 20, 2015). “Here’s why Canada’s red-hot housing market may be cooling, but won’t be crashing.” Global News.

[4] Global News (October 4, 20160. “Vancouver home sales plunge nearly 33% in September.”

[5] Reuters (October 14, 2016). “Canadian home sales edge up in September from August.”

[6] Andy Blatchford (October 19, 2016). “BoC drops growth outlook, cites housing, export declines.”

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