Photo: James Bombales
Last week, it was revealed that the Canadian economy had taken a serious hit in January, as the monthly GDP rate contracted 0.1 per cent. One of the main factors at play? The start of the year also saw a serious cooling of the housing market.
“Weakness was fairly widespread, as 10 of 20 major sectors saw activity decline, but a few stood out,” writes TD senior economist Brian DePratto, in a recent note. “Government changes to mortgage underwriting regulations led the real estate sector to a 0.5 per cent contraction, as activity at the offices of real estate agents and brokers saw the second largest decline on record.”
That decline — widely believed to be the result of a new mortgage stress test for uninsured buyers, which came into effect on January 1 — included a massive 14.5 per cent month-over-month drop in national home sales in January.
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The slump continued into February were sales declined by a more modest 6.5 per cent month-over-month.
According to CIBC economist Royce Mendes, the mortgage rules will likely keep sales on the low-side for the foreseeable future.
“A drop-off in housing activity to begin the new year was only the opening salvo,” he writes in a recent note. “A second shot came from a further decline in February. Now those weaker readings are beginning to show up in GDP data. Since the [new rules] took effect, unit sales have dived to their slowest pace in more than 5 years.”
As the market continues to cool, Mendes predicts that the Bank of Canada will be wary of raising the overnight rate any time soon. The rate, which affects mortgage rates, was hiked by 25 basis points in January to 1.25 per cent.
“Data on the Canadian housing market is now concerning enough that the Bank of Canada will want to wait until there’s some stabilization in residential real estate to nudge rates higher,” writes Mendes. “We’re still looking for Bank officials to hike rates only once more this year, leaving the loonie vulnerable to the slightly faster pace of rate increases stateside.”